Smart Hedging against Carbon Leakage

50 Pages Posted: 27 Nov 2019

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Halvor Briseid Storrøsten

Statistics Norway

Date Written: 2019

Abstract

Policy makers in the EU and elsewhere are concerned that unilateral carbon pricing induces carbon leakage through relocation of emission-intensive and trade-exposed industries to other regions. A common measure to mitigate such leakage is to combine an emission trading system (ETS) with output-based allocation (OBA) of allowances to exposed industries. We first show analytically that in a situation with an ETS combined with OBA, it is optimal to impose a consumption tax on the goods that are entitled to OBA, where the tax is equivalent in value to the OBA-rate. Then, using a multi-region, multi-sector computable general equilibrium (CGE) model calibrated to empirical data, we quantify the welfare gains for the EU to impose such a consumption tax on top of its existing ETS with OBA. We run Monte Carlo simulations to account for uncertain leakage exposure of goods entitled to OBA. The consumption tax increases welfare whether the goods are highly exposed to leakage or not, and can hence be regarded as smart hedging against carbon leakage.

Keywords: carbon leakage, output-based allocation, consumption tax

JEL Classification: D610, F180, H230, Q540

Suggested Citation

Bohringer, Christoph and Rosendahl, Knut Einar and Storrøsten, Halvor Briseid, Smart Hedging against Carbon Leakage (2019). CESifo Working Paper No. 7915. Available at SSRN: https://ssrn.com/abstract=3480921

Christoph Bohringer (Contact Author)

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

Halvor Briseid Storrøsten

Statistics Norway ( email )

N-0033 Oslo
Norway

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