Climate policy and the ‘carbon haven’ effect

Abstract

International audienceIn a world with uneven climate policies, the carbon price differentials across regions could shift the production of energy-intensive goods from carbon-constrained countries to " carbon havens " , or countries with laxer climate policy. This would reduce the environmental benefits of the policy (carbon leakage) while potentially damaging the economy (competitiveness concerns). A review on these questions is provided in this article. First we discuss the main terms involved such as carbon leakage, competitiveness, sectors at risk or climate spillovers. Then we analyse the studies evaluating the carbon leakage risk. Most ex ante modelling studies conclude to leakage rates in the range of 5-20% (if no option to mitigate leakage is implemented) whereas ex post econometric studies haven't revealed statistically significant evidence of leakage. Different policy options to face these issues are then examined with an emphasis on Border Carbon Adjustments (BCA). BCA consist in reducing the carbon price differentials of goods traded between countries. Properly implemented, they can reduce leakage (by around 10 percentage points in ex ante modelling studies) in a cost-effective way but are controversial because they shift a part of the abatement costs from abating countries to non-abating countries. Their impact on international negotiations is unclear: they could encourage third countries to join the abating coalition or trigger a trade war. Besides, their consistency with WTO rules is highly contentious among legal experts

Reaping the carbon rent: Abatement and overallocation profits in the European cement industry, insights from an LMDI decomposition analysis

“…Full auctioning for the cement sector would be the first best solution, but it is politically hard to achieve and presents some risks of carbon leakage in case of high carbon price (Dröge, 2009). Border carbon adjustments (BCAs), the secondbest option, could partially avoid carbon leakage 37 and restore competitiveness so as to allow full auctioning; but their compatibility with the World Trade Organization and their political acceptability at the international level is very challenging (Branger and Quirion, 2014a). Output-based allocations, especially based on a combined clinker and clinker-to-cement ratio benchmarking, would then represent a third-best solution, inducing less economic distortions and more incentive to reduce carbon emissions than the current allocation methodology.…”

Framework for the future? Exploring the possibility of majority voting in the climate negotiations

“…The threat of carbon leakage is rarely significant in an economy-wide 6 sense (Barker et al 2007;Zhou et al 2010). A review by Branger and Quirion (2014) of ex-post econometric studies observed that no study has found any statistically significant sign of carbon leakage. More specific studies, particularly on the EU ETS, have confirmed this in regard to both leakage (Branger et al 2013;Reinaud 2008) and loss of competitiveness (Anger and Oberndorfer 2008;Demailly and Quirion 2008).…”

Policy options for a socially balanced climate policy

“…Although there is no evidence that climate policy does indeed cause firms to relocate to unregulated countries (Branger and Quirion 2014), the potential job loss in energy intensive industries is a concern to decision makers. Just in case there really is a threat to jobs in the energy intensive industry, several options to avoid the job loss are available.…”