Competitiveness and Leakage Concerns and Border Carbon Adjustments

Abstract

This paper provides a review of the literature on competitiveness and leakage concerns associated with differentiated climate abatement commitments among countries. The literature reviewed is not exhausted, but it is sufficient to provide a balanced view of both academics and policy circles. Section 2 discusses how to indentify the sectors at a risk of carbon leakage. Section 3 examines ex ante estimates of potential carbon leakage rates, and explains why they differ from ex post results of environmental tax reforms and greenhouse gas emissions trading schemes that have been implemented in the European Union. Section 4 discusses broad policy options to address competitiveness and leakage concerns, and compares which anti-leakage policy, border adjustments or output-based allocation, is more effective to limiting carbon leakages or mitigating production loss in the sectors affected. Given that border carbon adjustment measures are incorporated in the U.S. proposed congressional climate bills to level the carbon playing field and could have potential conflicts with World Trade Organization (WTO) provisions and practical difficulties associated with their implementation, Section 5 discuses in great detail the WTO consistency, the effectiveness and methodological challenges of border carbon adjustment measures. The paper ends with some concluding remarks.

Intermediate input linkage and carbon leakage

“…This will lead to carbon leakage across sectors, given that the products of the regulated sectors are widely used in industrial production as intermediate inputs, such as electricity, and the share of intermediate inputs per unit of outputs increases gradually (Xu and Dietzenbacher, 2014). This domestic leakage may in turn offset the carbon reduction of the regulated sectors (Zhang, 2012; Baylis et al , 2014; World Bank, 2015). This situation highlights that intermediate input linkage may be an important influencing factor of carbon leakage.…”

“… 1 The literature presents different leakage channels, such as a fossil fuel channel (e.g., Dröge et al , 2009), competitiveness channel (e.g., Bruvoll and Fæhn, 2006; Zhang, 2012), terms-of-trade effect (e.g., Di Maria and van der Werf, 2008; Baylis et al , 2014), technology channel (e.g., Golombek and Hoel, 2004; Sijm et al , 2004; Dröge et al , 2009; Gerlagh and Kuik, 2014), abatement resource effect (Baylis et al , 2014), intertemporal channel (e.g., Michielsen, 2014; Eichner and Pethig, 2015) and scale channel (e.g., Kuik and Gerlagh, 2003; Karp, 2013). The Harberger-type model is applicable for discussing the short-term effects of climate policies; therefore, this study does not consider the technology development and intertemporal channel of carbon leakage.…”

Intermediate Input Linkage and Carbon Leakage

“…This would lead to carbon leakage across sectors, given that the products of the regulated sectors are widely used in industrial production as intermediate inputs, such as electricity and the share of intermediate inputs per unit of outputs increases gradually (Xu and Dietzenbacher, 2014). This domestic leakage may in turn offset the carbon reduction of the regulated sectors (Zhang, 2012;Baylis et al, 2014;World Bank, 2015). This highlights that intermediate input linkage may be an important influence factor of carbon leakage.…”

“…Dröge et al, 2009), competitiveness channel (e.g. Bruvoll and Faehn, 2006;Zhang, 2012), terms-of-trade effect (e.g. Baylis et al, 2014;Di Maria and Van der Werf, 2008), technology channel (e.g.…”

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness, leakage and welfare

“… For further reading about measures dealing with carbon leakage and competitiveness, and schemes proposed in different regions, see, e.g., Heilmayr and Bradbury (), Zhang () and Hallegatte et al. (). …”