The Role of Competitiveness Instruments in the Climate Policy Debate - Addressing Fragmented Carbon Markets

As countries advance in climate change mitigation policy, with different timing and approaches, fragmented carbon markets are emerging. Differences in climate change policy approaches may have impacts on the relative competitiveness of internationally operating energy-intensive sectors in countries with more stringent policies. These concerns have stimulated a debate on the design of climate policies as well as on additional policies that could reduce the negative impacts of climate policies on competitiveness. This paper examines the competitiveness impacts of a range of stylised global mitigation scenarios, plus investigates common policy instruments to address competitiveness impacts of climate policies. The analysis uses the OECD‟s global recursive-dynamic general equilibrium model ENV-Linkages. The paper focuses on border tax adjustments, and both direct and indirect linking (i.e. offsets). The different policy instruments to address competitiveness have implications on economic efficiency, environmental impacts, and international competitiveness for both acting countries and countries that do not participate directly in climate policy. This paper compares the implementation of these instruments with a climate policy without additional instruments to deal with competitiveness using a range of metrics, such as welfare, carbon leakage and output. A key finding from the analysis is that while the temporary use of these policy instruments may ease the transition of Emission-Intensive, Trade-Exposed Industries (EITs) to a low-emission economy, all have important drawbacks. A ranking of these instruments depends crucially on which metric is deemed most important. Further, as more countries adopt climate change mitigation policies, the benefits of instruments to address competitiveness concerns quickly diminish.