Policy options for preventing leakage:
an international perspective
Carolyn Fischer, RFF
May 7, 2012
Understanding and Estimating
Carbon Leakage
 Two channels for carbon leakage:
– Shifting economic activity and investment
("competitiveness")
– Global energy market response to demand shifts
 Leakage is hard to identify in practice; most
analyses use simulation models of global trade
– Roughly 5-20% overall, but can be much higher for
– certain sectors (energy intensive and trade exposed)
and small coalitions
Simulated Medium-Run Leakage
Rates for Europe
100%
90%
80%
70%
$50 / ton carbon price alone
(10 euro / ton CO2)
Unilateral EU policy
60%
50%
40%
30%
20%
10%
0%
Electricity
Refined Oil
Chemicals Nonmetallic Iron & Steel Nonferrous
Metals
Metals
Options for Coping with Leakage
 Global carbon pricing
Options for Coping with Leakage
 Global carbon pricing
 Weakening policies
“European carbon market in trouble” – Washington Post
May 7, 2013
Options for Coping with Leakage
 Global carbon pricing
 Weakening policies
 Measures to address competitiveness-related
leakage
Option 1: Border Carbon Adjustment (BCA)
 Taxing imports based on a measure of their carbon
content
 Ensures consumers pay carbon-inclusive price,
regardless of origin
 Doesn’t address export competitiveness
– Could add refunding for exports for destination-based
carbon pricing, but may be WTO-incompatible
 Controversial
– EU Aviation rule
Option 2: Output-Based Rebating (OBR)
 Allocates allowances based on an industry average
performance benchmark
– Updated, not pure “grandfathering”
– Proposed in Waxman-Markey; EU uses a variant;
Sweden uses for NOx
 Preserves carbon price signal, mitigates product
price increase
– Dampens leakage, but distorts conservation incentives
 Implies other sectors will have to do more to meet same target
 important for determining sector eligibility
% Change in Production,
of which Change in Net Exports
20% reduction target
in U.S.
Option 3: Exempting Certain Sectors
 Can be complete or partial
– Sweden charges lower CO2 tax to industry
 Mitigates cost increase, like OBR
 But also reduces or eliminates incentives for those
sectors to reduce emissions!
 Doesn’t address costs from indirect emissions
 Poor option
Comparing Options:
Cost-Effectiveness
 How well is the policy designed?
– Scope and details matter
 How strong are conservation opportunities?
 How much leakage comes from lost export
competitiveness?
 How important is it to differentiate among trading
partners? How large is the coalition?
 How else would you allocate the emissions
revenues?
Global Cost Savings of Antileakage
Measures, and Global Costs of Carbon Price
OBR
BAI
FBA
Global costs (Right-hand axis)
25
0.40
Percent Change from Tax
0.30
15
0.25
10
0.20
0.15
5
0.10
-
0.05
-5
0.00
EU
EU+US
A1
Coalition
A1+BASIC
All
Percent Change from BAU
0.35
20
Comparing Options:
Acceptability
 Domestic politics:
– How do they affect key sectors and consumers?
 International politics:
– How do they affect the burdens of less
developed countries?
 WTO compatibility:
– How effective are they at meeting
environmental aims?
Changes in Exports of EITE Products
(Joint U.S. and EU Policies to reduce emissions 20%)
AUCTION
OUTPUT
TARIFF
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
U.S.
-1.0%
-2.0%
-3.0%
EU
Japan
Russia
China
India
Brazil
Oth.AFR
Changes in Burdens:
Economic Adjustment Cost for China
Coalition
EU
EU_US
A1
A1_BASIC
Consumption (in % from BaU)
0
-0,2
-0,4
-0,6
-0,8
-1
-1,2
-1,4
Tax
OBR
BAI
FBA
Changes in Burdens:
Use of BCA Revenues
Auction
BCA (exporter
keeps revenues)
BCA (importer
keeps revenues)
Annex-I Coalition
Non-Coalition
Role of Revenue Recycling
 Pre-existing taxes distort labor (and capital) markets
– Higher prices from regulation lower real wage, reducing
labor supply and tax revenue: “Tax Interaction”
– It matters how we use the revenues
 Can make OBR better than BCA if revenues would
otherwise be grandfathered, rather than used to lower
tax burdens
Conclusions and Caveats
 OBR and BCA have potential to improve efficiency
and reduce leakage from unilateral climate policy
– If appropriately circumscribed
– Must phase out OBR as more trade partners regulate CO2
 Not recycling the revenue is costly
 Serious practical challenges for both OBR and BCA
– defining appropriate metrics for eligibility, consistent
units of production, benchmarks that do not mute the
effectiveness of the carbon price, embodied carbon calcs
 Most models (like ours) lack sufficient sectoral detail
to capture these issues and further research is needed.
Thanks!
 Mistra Foundation INDIGO and
ENTWINED programs are gratefully
acknowledged.
Leakage by Sector
(U.S. Policy; Fischer and Fox 2012, JEEM)
60%
50%
40%
30%
20%
10%
0%
Refined Oil
Chemicals
-10%
Nonmetallic
Minerals
Iron & Steel
Nonferrous
Metals
No adjustment
Import Tax (Foreign Carbon Intensity)
Import Tax (Home Carbon Intensity)
Output-Based Rebating
Global Leakage Effects
AUCTION
OUTPUT
TARIFF
30%
25%
20%
15%
10%
5%
0%
U.S. policy
EU policy
U.S. and EU policies
Leakage Rates (% from bau)
•
•
•
ref leakage rates: ~ 5%-20% (mean: ~12%)
BCA are quite effective in reducing leakage (mean: ~ 7.5%)
btax is only slightly more effective in reducing leakage than tariff (mean: ~ 8%)
Burden Shifting (% ch GDP from bau)
Changes in Burdens: ROW
(Consumption Effects of Joint U.S. and EU Action)
AUCTION
0.3%
0.0%
-0.3%
-0.6%
-0.9%
-1.2%
-1.5%
OUTPUT
TARIFF
Sensitivity of U.S. Welfare Changes
to Stringency of Emissions Reduction Target (Millions of 2004 USD)
Compared to 100% recycling
20,000
 U.S. prefers OBR to BCA for EITE sectors
15,000
Auction
10,000
Auction
+ OBR
5,000
Auction
+ BCA
0
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
- 5,000
Grandfather
- 10,000
Grandfather
+ OBR
-15,000
-20,000
- 25,000
- 30,000
Grandfather
+ BCA
Sensitivity of Global Net Welfare Changes
to Stringency of Emissions Reduction Target (Millions of 2004 USD)
Compared to 100% recycling
10,000
 Global welfare highest with BCA + recycling,
while recycling generally preferred to OBR
5,000
0
0
2
4
6
8
10
12
14
16
18
20
22
-25,000
- 30,000
28
30
Grandfather
- 10,000
-20,000
26
Auction
+ OBR
Auction
+ BCA
- 5,000
-15,000
24
Auction
 If revenues are transferred,
OBR and BCA both preferred to
no treatment of EITE sectors
Grandfather
+ OBR
Grandfather
+ BCA