IDEAS home Printed from https://ideas.repec.org/a/wly/canjec/v50y2017i2p426-455.html
   My bibliography  Save this article

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness, leakage and welfare

Author

Listed:
  • Christoph Böhringer
  • Brita Bye
  • Taran Fæhn
  • Knut Einar Rosendahl

Abstract

We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency. Remboursement des taxes sur le carbone sur la base de la production selon les taxes sur le carbone dans l'arrière‐cour du voisin: compétitivité, coulage, et bien‐être. On examine comment, dans une économie ouverte, des taxes sur le carbone combinées à des remboursements basés sur la production (RBP) se définissent en interaction avec les politiques sur le carbone d'un grand partenaire commercial voisin. Les résultats analytiques suggèrent que, quel que soit l'objectif de la politique de RBP (compenser pour le fardeau des taxes sur la carbone ou maximiser le bien‐être compte tenu de la mission globale de réduction des émissions), le taux RBP devrait être positif dans les cas pertinents au plan de la politique publique. Des simulations numériques faites pour le Canada et les États‐Unis, son grand partenaire commercial voisin, montrent que l'impact des politiques américaines sur le taux RBP va dépendre fondamentalement de l'objectif des politiques RBP du Canada. Si, pour une politique américaine de carbone donnée, le but du Canada est de restaurer la compétitivité des firmes domestiques à forte intensité d'émissions et exposées au commerce international (FIEECI) au même niveau qu'elle était avant l'imposition de sa propre taxe sur le carbone, on montre que les taux domestiques nécessaires de RBP vont être insensibles aux politiques de carbone étrangères. Cependant, si non seulement des taxes sur le carbone au Canada sont mises en place mais que des taxes aussi élevées sont imposées aux États‐Unis, les taux RBP canadiens compensatoires vont être jusqu'à 50 % plus bas selon les secteurs et la politique de RBP des États‐Unis. Si l'objectif de la politique est d'accroître l'efficacité de l'allocation des ressources dans l'économie dans son ensemble (l'effet de bien‐être) des politiques canadiennes en tenant compte du coulage de carbone, les politiques américaines vont exercer une pression mineure à la baisse sur les taux désirables de RBP au Canada. Les choix pratiques de taux de RBP vont à peine affecter la performance agrégée de l'économie domestique – donc les RBP se qualifient comme un instrument compensatoire pour les industries à forte intensité d'émissions et exposées au commerce international, sans un grand sacrifice en termes d'efficacité dans l'allocation des ressources de l'économie dans son ensemble.

Suggested Citation

  • Christoph Böhringer & Brita Bye & Taran Fæhn & Knut Einar Rosendahl, 2017. "Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness, leakage and welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(2), pages 426-455, May.
  • Handle: RePEc:wly:canjec:v:50:y:2017:i:2:p:426-455
    DOI: 10.1111/caje.12264
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/caje.12264
    Download Restriction: no

    File URL: https://libkey.io/10.1111/caje.12264?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, vol. 24(6), pages 557-576, November.
    2. Hallegatte, Stephane & Fay, Marianne & Vogt-Schilb, Adrien, 2013. "Green industrial policies : when and how," Policy Research Working Paper Series 6677, The World Bank.
    3. Zhang, Zhong Xiang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," International Review of Environmental and Resource Economics, now publishers, vol. 6(3), pages 225-287, December.
    4. Dissou Yazid, 2006. "Efficiency and Sectoral Distributional Impacts of Output-Based Emissions Allowances in Canada," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-33, September.
    5. Gilbert E. Metcalf, 2014. "Using the Tax System to Address Competition Issues With a Carbon Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 779-806, December.
    6. A. Lans Bovenberg & Lawrence H. Goulder, 2001. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 45-90, National Bureau of Economic Research, Inc.
    7. Böhringer, Christoph & Fischer, Carolyn & Rosendahl, Knut Einar, 2014. "Cost-effective unilateral climate policy design: Size matters," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 318-339.
    8. Boehringer Christoph & Fischer Carolyn & Rosendahl Knut Einar, 2010. "The Global Effects of Subglobal Climate Policies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
    9. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS: Border adjustment or output-based allocation?," Ecological Economics, Elsevier, vol. 70(11), pages 1957-1971, September.
    10. Böhringer, Christoph & Bye, Brita & Fæhn, Taran & Rosendahl, Knut Einar, 2012. "Alternative designs for tariffs on embodied carbon: A global cost-effectiveness analysis," Energy Economics, Elsevier, vol. 34(S2), pages 143-153.
    11. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 157-183, August.
    12. repec:zbw:hohpro:345 is not listed on IDEAS
    13. Fischer, Carolyn & Fox, Alan K., 2012. "Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 199-216.
    14. Christoph Böhringer & Andreas Lange, 2005. "Economic Implications of Alternative Allocation Schemes for Emission Allowances," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 563-581, September.
    15. repec:dau:papers:123456789/7346 is not listed on IDEAS
    16. Bernard, Alain L. & Fischer, Carolyn & Fox, Alan K., 2007. "Is there a rationale for output-based rebating of environmental levies?," Resource and Energy Economics, Elsevier, vol. 29(2), pages 83-101, May.
    17. Edward J. Balistreri & Ayed Al-Qahtani & Carol A. Dahl, 2010. "Oil and Petroleum Product Armington Elasticities: A New-Geography-of-Trade Approach to Estimation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 167-180.
    18. Rivers, Nic, 2010. "Impacts of climate policy on the competitiveness of Canadian industry: How big and how to mitigate?," Energy Economics, Elsevier, vol. 32(5), pages 1092-1104, September.
    19. James R. MARKUSEN, 2021. "International Externalities And Optimal Tax Structures," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 16, pages 341-355, World Scientific Publishing Co. Pte. Ltd..
    20. Robert Heilmayr & James A. Bradbury, 2011. "Effective, efficient or equitable: using allowance allocations to mitigate emissions leakage," Climate Policy, Taylor & Francis Journals, vol. 11(4), pages 1113-1130, July.
    21. Nic Rivers & Mark Jaccard, 2010. "Intensity-Based Climate Change Policies in Canada," Canadian Public Policy, University of Toronto Press, vol. 36(4), pages 409-428, December.
    22. Graham, Paul & Thorpe, Sally & Hogan, Lindsay, 1999. "Non-competitive market behaviour in the international coking coal market," Energy Economics, Elsevier, vol. 21(3), pages 195-212, June.
    23. Lennox, James A. & van Nieuwkoop, Renger, 2010. "Output-based allocations and revenue recycling: Implications for the New Zealand Emissions Trading Scheme," Energy Policy, Elsevier, vol. 38(12), pages 7861-7872, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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).
    2. Kaushal, Kevin Raj, 2018. "Emission price, output-based allocation and consumption tax: Optimal climate policy in the presence of another country’s climate policy," Working Paper Series 8-2018, Norwegian University of Life Sciences, School of Economics and Business.
    3. Kevin R. Kaushal & Knut Einar Rosendahl, 2020. "Taxing Consumption to Mitigate Carbon Leakage," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(1), pages 151-181, January.
    4. Rausch, Sebastian & Zhang, Da, 2018. "Capturing natural resource heterogeneity in top-down energy-economic equilibrium models," Energy Economics, Elsevier, vol. 74(C), pages 917-926.
    5. William Wills & Emilio Lebre La Rovere & Carolina Grottera & Giovanna Ferrazzo Naspolini & Gaëlle Le Treut & F. Ghersi & Julien Lefèvre & Carolina Burle Schmidt Dubeux, 2022. "Economic and social effectiveness of carbon pricing schemes to meet Brazilian NDC targets," Post-Print hal-03500923, HAL.
    6. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christoph Böhringer & Brita Bye & Taran Fæhn & Rosendahl Knut Einar, 2014. "Output-based rebating of carbon taxes in the neighbor’s backyard," Working Papers V-382-15, University of Oldenburg, Department of Economics, revised Jun 2014.
    2. Christoph Böhringer & Knut Einar Rosendahl & Halvor Storrøsten, 2021. "Smart hedging against carbon leakage [An overview of the GTAP 9 data base]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(107), pages 439-484.
    3. Christoph Böhringer & Brita Brita Bye & Taran Fæhn & Knut Einar Rosendahl, 2015. "Targeted carbon tariffs - Carbon leakage and welfare effects," Working Papers V-376-15, University of Oldenburg, Department of Economics, revised Mar 2015.
    4. Böhringer, Christoph & Bye, Brita & Fæhn, Taran & Rosendahl, Knut Einar, 2017. "Targeted carbon tariffs: Export response, leakage and welfare," Resource and Energy Economics, Elsevier, vol. 50(C), pages 51-73.
    5. repec:old:wpaper:355 is not listed on IDEAS
    6. Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
    7. repec:zbw:hohpro:355 is not listed on IDEAS
    8. Christoph Bohringer & Knut Einar Rosendahl & Jan Schneider, 2014. "Unilateral Climate Policy: Can OPEC Resolve the Leakage Problem?," The Energy Journal, , vol. 35(4), pages 79-100, October.
    9. Böhringer, Christoph & Rosendahl, Knut Einar & Storrøsten, Halvor Briseid, 2017. "Robust policies to mitigate carbon leakage," Journal of Public Economics, Elsevier, vol. 149(C), pages 35-46.
    10. Christoph Böhringer & Knut Einar Rosendahl & Halvor Briseid Storrøsten, 2015. "Mitigating carbon leakage: Combining output-based rebating with a consumption tax," ZenTra Working Papers in Transnational Studies 54 / 2015, ZenTra - Center for Transnational Studies.
    11. Böhringer, Christoph & Fischer, Carolyn & Rosendahl, Knut Einar, 2014. "Cost-effective unilateral climate policy design: Size matters," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 318-339.
    12. Böhringer, Christoph & Garcia-Muros, Xaquin & Cazcarro, Ignacio & Arto, Iñaki, 2017. "The efficiency cost of protective measures in climate policy," Energy Policy, Elsevier, vol. 104(C), pages 446-454.
    13. Jared C. Carbone & Nicholas Rivers, 2014. "Climate policy and competitiveness: Policy guidance and quantitative evidence," Working Papers 2014-05, Colorado School of Mines, Division of Economics and Business.
    14. 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).
    15. Christoph Böhringer & Jan Schneider & Emmanuel Asane-Otoo, 2016. "Trade In Carbon And The Effectiveness Of Carbon Tariffs," Working Papers V-388-16, University of Oldenburg, Department of Economics, revised Apr 2016.
    16. Fischer, Carolyn & Greaker, Mads & Rosendahl, Knut Einar, 2017. "Robust technology policy against emission leakage: The case of upstream subsidies," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 44-61.
    17. Böhringer, Christoph & Bye, Brita & Fæhn, Taran & Rosendahl, Knut Einar, 2012. "Alternative designs for tariffs on embodied carbon: A global cost-effectiveness analysis," Energy Economics, Elsevier, vol. 34(S2), pages 143-153.
    18. Branger, Frédéric & Quirion, Philippe, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Ecological Economics, Elsevier, vol. 99(C), pages 29-39.
    19. Zhang, Zhong Xiang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," International Review of Environmental and Resource Economics, now publishers, vol. 6(3), pages 225-287, December.
    20. Madison Condon & Ada Ignaciuk, 2013. "Border Carbon Adjustment and International Trade: A Literature Review," OECD Trade and Environment Working Papers 2013/6, OECD Publishing.
    21. Christoph Böhringer & Jan Schneider & Emmanuel Asane-Otoo, 2021. "Trade in Carbon and Carbon Tariffs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(4), pages 669-708, April.
    22. Böhringer, Christoph & Garcia-Muros, Xaquin & Gonzalez-Eguino, Mikel & Rey, Luis, 2017. "US climate policy: A critical assessment of intensity standards," Energy Economics, Elsevier, vol. 68(S1), pages 125-135.

    More about this item

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:canjec:v:50:y:2017:i:2:p:426-455. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1540-5982 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.