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Mitigating Emissions Leakage in Incomplete Carbon Markets

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  • Meredith L. Fowlie
  • Mar Reguant

Abstract

Policies regulating greenhouse gas emissions apply to a small subset of emitting sources. This raises a formidable concern: emissions can “leak” from regulated to unregulated sources. We provide a theoretical basis for deriving industry-specific measures of leakage risk and for calibrating the output-based subsidies that are currently used to mitigate leakage. Using US energy price variation as a proxy for variation that would be induced by a domestic carbon price, we show how theoretically consistent leakage-mitigating subsidies can be calibrated. We simulate the impacts of a domestic carbon price on US manufacturing with and without these subsidies. Absent mitigation, emissions leakage is substantial. Output-based subsidies targeted on the basis of our leakage risk measures significantly reduce this leakage risk. In contrast, the current practice of coarsely targeting subsidies on the basis of emissions intensity and trade exposure delivers a small fraction of leakage mitigation benefits while incurring significant costs.

Suggested Citation

  • Meredith L. Fowlie & Mar Reguant, 2022. "Mitigating Emissions Leakage in Incomplete Carbon Markets," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(2), pages 307-343.
  • Handle: RePEc:ucp:jaerec:doi:10.1086/716765
    DOI: 10.1086/716765
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    Cited by:

    1. Michael Keen & Ian Parry & James Roaf, 2022. "Border carbon adjustments: rationale, design and impact," Fiscal Studies, John Wiley & Sons, vol. 43(3), pages 209-234, September.
    2. Ambec, Stefan & Esposito, Federico & Pacelli, Antonia, 2024. "The economics of carbon leakage mitigation policies," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    3. Fraser, Alastair & Kuok, Jonathan Chiew Sheen & Leslie, Gordon W., 2023. "Climate reform and transitional industry assistance: Windfall profits for polluters?," Energy Economics, Elsevier, vol. 121(C).
    4. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara & Stillger, Sabine & Wagner, Ulrich, 2023. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics," CEPR Discussion Papers 18645, C.E.P.R. Discussion Papers.
    5. Saussay, Aurelien & Sato, Misato, 2024. "The impact of energy prices on industrial investment location: evidence from global firm level data," LSE Research Online Documents on Economics 123034, London School of Economics and Political Science, LSE Library.
    6. Ambec, Stefan, 2022. "The European Union’s Carbon Border Adjustment Mechanism: Challenges and Perspectives," TSE Working Papers 22-1365, Toulouse School of Economics (TSE).
    7. Jia, Zhijie & Wu, Rongxin & Liu, Yu & Wen, Shiyan & Lin, Boqiang, 2024. "Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?," Ecological Economics, Elsevier, vol. 220(C).
    8. Basaglia, Piero & Isaksen, Elisabeth & Sato, Misato, 2024. "Carbon pricing, compensation and competitiveness: lessons from UK manufacturing," LSE Research Online Documents on Economics 122364, London School of Economics and Political Science, LSE Library.
    9. He, Ling-Yun & Chen, Kun-Xian, 2023. "Does China's regional emission trading scheme lead to carbon leakage? Evidence from conglomerates," Energy Policy, Elsevier, vol. 175(C).
    10. Eugenie Dugoua & Todd D. Gerarden, 2023. "Induced innovation, inventors and the energy transition," CEP Discussion Papers dp1951, Centre for Economic Performance, LSE.
    11. Li, Haoyang & Wu, Nan, 2022. "Emission pricing, emission rebound, and the coverage scope of incomplete regulations," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    12. Ferguson, Shon & Heijmans, Roweno J.R.K., 2023. "Climate Policy and Trade in Polluting Technologies," Working Paper Series 1470, Research Institute of Industrial Economics.
    13. Yuexu Zhao & Weiqi Xu, 2023. "Measurement of risk spillover effect based on EV-Copula method," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-10, December.
    14. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara & Stillger, Sabine & Wagner, Ulrich, 2023. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics," CEPR Discussion Papers 18645, C.E.P.R. Discussion Papers.
    15. Christoph Böhringer & Knut Einar Rosendahl & Halvor Briseid Storrøsten, 2024. "Measures against Carbon Leakage – Combining Output-Based Allocation with Consumption Taxes," CESifo Working Paper Series 11102, CESifo.
    16. Fabra, Natalia & Reguant, Mar, 2024. "The energy transition: A balancing act," Resource and Energy Economics, Elsevier, vol. 76(C).
    17. repec:bon:boncrc:crctr224_2024_495 is not listed on IDEAS

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