Output-Based Allocation of Emissions Permits for Mitigating the Leakage and Competitiveness Issues for the Japanese Economy

Resources for the Future Discussion Paper No. 11-40

51 Pages Posted: 5 Jan 2012  

Shiro Takeda

Kyoto Sangyo University

Toshi H. Arimura

Waseda University - School of Political Science and Economics

Carolyn Fischer

Resources for the Future

Alan K. Fox

U.S. International Trade Commission

Hanae Tamechika

affiliation not provided to SSRN

Date Written: September 16, 2011

Abstract

The adoption of domestic emissions trading schemes (ETS) can impose a heavy burden on energy-intensive industries. In particular, energy-intensive industries competing with foreign competitors could lose their international edge. Although the abatement of carbon dioxide (CO2) emissions in industrialized countries entails the reduction of their energy-intensive production, a corresponding increase in the production of energy-intensive goods in countries without CO2 regulations may lead to carbon “leakage.” This paper examines the effects of various allocation methods for granting emissions permits in the Japanese ETS on the economy and CO2 emissions using a multiregional and multisector computable general equilibrium model. Specifically, we apply the Fischer and Fox (2007) model to the Japanese economy to address carbon leakage and competitiveness issues. We compare auction schemes, grandfathering schemes, and output-based allocation (OBA) schemes. We further extend the model by examining a combination of auctions and OBA. Though the auction scheme is found to be the best in terms of macroeconomic impacts (welfare and GDP effects), the leakage rate is high and the harm to energy-intensive sectors can be significant. OBA causes less leakage and damage to energy-intensive sectors, but the macroeconomic impact is undesirable. Considering all three effects — leakage, competitiveness, and macroeconomics — we find that combinations of auctions and OBA (with gratis allocations solely to energy-intensive, trade-exposed sectors) are desirable.

Keywords: climate change, emissions trading, emissions permit allocations, output-based allocation, auction, grandfathering, international competitiveness, carbon leakage, CGE analysis

JEL Classification: C68, D42

Suggested Citation

Takeda, Shiro and Arimura, Toshi H. and Fischer, Carolyn and Fox, Alan K. and Tamechika, Hanae, Output-Based Allocation of Emissions Permits for Mitigating the Leakage and Competitiveness Issues for the Japanese Economy (September 16, 2011). Resources for the Future Discussion Paper No. 11-40. Available at SSRN: https://ssrn.com/abstract=1978511 or http://dx.doi.org/10.2139/ssrn.1978511

Shiro Takeda

Kyoto Sangyo University ( email )

Motoyama, Kamigamo
Kitaku
Kyoto City, Kyoto 603-8555
Japan

HOME PAGE: http://shirotakeda.org/

Toshihide H. Arimura

Waseda University - School of Political Science and Economics ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050, Tokyo 169-8050
Japan

Carolyn Fischer (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5012 (Phone)
202-939-3460 (Fax)

HOME PAGE: http://www.rff.org/~fischer

Alan K. Fox

U.S. International Trade Commission ( email )

500 E St SW
Washington, DC 20436
United States
202-205-3267 (Phone)
202-205-2340 (Fax)

HOME PAGE: http://www.usitc.gov

Hanae Tamechika

affiliation not provided to SSRN

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