Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating Greenhouse Gas Emissions

Resources for the Future Discussion Paper 16-06

30 Pages Posted: 28 Feb 2016

See all articles by Joseph E. Aldy

Joseph E. Aldy

Harvard Kennedy School; National Bureau of Economic Research; Resources for the Future; Harvard University - Harvard Kennedy School (HKS)

Date Written: February 17, 2016

Abstract

Domestic carbon pricing policies may impose adverse competitiveness risks on energy-intensive firms and industries competing with foreign firms that may bear a lower or zero price on carbon. The risks of competitiveness effects include adverse economic outcomes — reduced production, lower employment, and higher net imports — and adverse environmental outcomes, with the shifting of emissions-intensive activities to unregulated foreign markets. Each can undermine political support for carbon pricing. Competitiveness policies, such as border tax adjustments, output-based tax credits, and related policies, also carry potential risks. They may result in less favorable distributional outcomes, undermine cost-effectiveness and economic efficiency, and raise risks in international trade and multilateral climate negotiations. This paper reviews the theoretical and empirical research on competitiveness risks, as well as the risks posed by competitiveness policies, and presents two alternative frameworks through which policymakers can weigh these various risks when evaluating policy options for addressing potential competitiveness effects as a part of a domestic carbon pricing regime.

Keywords: border tax, tariffs, leakage, competitiveness, political economy

JEL Classification: F13, H23, Q54

Suggested Citation

Aldy, Joseph E., Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating Greenhouse Gas Emissions (February 17, 2016). Resources for the Future Discussion Paper 16-06. Available at SSRN: https://ssrn.com/abstract=2738759 or http://dx.doi.org/10.2139/ssrn.2738759

Joseph E. Aldy (Contact Author)

Harvard Kennedy School

79 JFK Street
Cambridge, MA 02138
United States
617-496-7213 (Phone)

HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/joseph-aldy

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future

79 JFK Street
Cambridge, MA 02138
United States
617-496-7213 (Phone)

HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/joseph-aldy

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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