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The economics of carbon leakage mitigation policies

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  • Ambec, Stefan
  • Esposito, Federico
  • Pacelli, Antonia

Abstract

In a trade model with endogenous emissions abatement, we investigate the impact of three policy instruments aimed at mitigating carbon leakage: free emission allowances, Carbon Border Adjustment Mechanism (CBAM) and CBAM with export rebates. We show that providing allowances for free does not alter the incentives to abate carbon emissions, but fosters the entry of more carbon intensive producers. It levels the “playing field” both domestically and internationally, and it may even reverse the carbon leakage. In contrast, the CBAM levels the playing field only domestically, and it may lead to an autarky equilibrium. To reverse the carbon leakage, the CBAM must be complemented with export rebates. We further show that the CBAM increases welfare for any share of free allowances, and identify the optimal share of free allowances with or without CBAM. Finally, we perform a calibration exercise on cement and steel sectors to simulate the effects of the CBAM recently adopted by the European Union. Our model predicts a scenario with reverse carbon leakage and significant welfare gains for both sectors.

Suggested Citation

  • Ambec, Stefan & Esposito, Federico & Pacelli, Antonia, 2023. "The economics of carbon leakage mitigation policies," TSE Working Papers 23-1408, Toulouse School of Economics (TSE), revised Sep 2023.
    • Handle: RePEc:tse:wpaper:127834
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    References listed on IDEAS

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    1. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
    2. Edward J. Balistreri & Daniel T. Kaffine & Hidemichi Yonezawa, 2019. "Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 1037-1075, November.
    3. Esposito, Federico, 2020. "Estimating the welfare costs of autarky: A sufficient statistics approach," Economics Letters, Elsevier, vol. 194(C).
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    5. David A. Weisbach & Samuel Kortum & Michael Wang & Yujia Yao, 2023. "Trade, Leakage, and the Design of a Carbon Tax," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 4(1), pages 43-90.
    6. Breen, James P. & Clancy, Daragh & Donnellan, Trevor & Hanrahan, Kevin F., 2012. "Estimating the Elasticity of Demand and the Production Response for Nitrogen Fertiliser on Irish Farms," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134965, Agricultural Economics Society.
    7. Böhringer, Christoph & Balistreri, Edward J. & Rutherford, Thomas F., 2012. "The role of border carbon adjustment in unilateral climate policy: Overview of an Energy Modeling Forum study (EMF 29)," Energy Economics, Elsevier, vol. 34(S2), pages 97-110.
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    Cited by:

    1. Ambec, Stefan & Yang, Yuting, 2024. "Climate policy with electricity trade," Resource and Energy Economics, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Carbon pricing; trade; carbon leakage; CBAM; free allowances; export rebates;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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