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Addressing leakage in the EU ETS: Border adjustment or output-based allocation?

descriptionPublicationkeyboard_double_arrow_right Article , Journal , Preprint , Report 01 Sep 2011 France Publisher:Elsevier BVJournal:Ecological Economics, volume 70, pages 1,957-1,971 (issn: 0921-8009,

Authors: Monjon, Stephanie; Quirion, Philippe;

doi: 10.1016/j.ecolecon.2011.04.020

Addressing leakage in the EU ETS: Border adjustment or output-based allocation?

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Abstract

The EU ETS has been criticised for threatening the competitiveness of European industry and generating carbon leakage, i.e. increasing foreign greenhouse gas emissions. Two main options have been put forward to tackle these concerns: border adjustments and output-based allocation, i.e. allocation of free allowances in proportion to current production. We compare various configurations of these two options, as well as a scenario with full auctioning and no border adjustment. Against this background, we develop a model of the main sectors covered by the EU ETS: electricity, steel, cement and aluminium. We conclude that the most efficient way to tackle leakage is auctioning with border adjustment, which generally induces a negative leakage (a spillover). This holds even if the border adjustment does not include indirect emissions, if it is based on EU (rather than foreign) specific emissions, or (for some values of the parameters) if it covers only imports. Another relatively efficient policy is to combine auctioning in the electricity sector and output-based allocation in exposed industries, especially if free allowances are given both for direct and indirect emissions, i.e. those generated by the generation of the electricity consumed. Although output-based allocation is generally less effective than border adjustment to tackle leakage, it is more effective to mitigate production losses in the sectors affected by the ETS, which may ease climate policy adoption. (C) 2011 Elsevier B.V. All rights reserved.

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France

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Keywords

[SHS.ECO] Humanities and Social Sciences/Economies and finances, [QFIN.GN] Quantitative Finance [q-fin]/General Finance [q-fin.GN], allocation basée sur la production, Emission trading; border adjustment; output‐based allocation; competitiveness; carbon leakage;, [ QFIN.GN ] Quantitative Finance [q-fin]/General Finance [q-fin.GN], [ SHS.ECO ] Humanities and Social Sciences/Economies and finances, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, [SDV.EE]Life Sciences [q-bio]/Ecology, environment, competitiveness, Q54, système de permis négociables, ECO] Humanities and Social Sciences/Economies and finances [[SHS], [SHS.ECO]Humanities and Social Sciences/Economics and Finance, Q58, [SDV.EE] Life Sciences [q-bio]/Ecology, environment, Emission trading,border adjustment,output-based allocation,competitiveness,carbon leakage,système de permis négociables,ajustement aux frontières,allocation basée sur la production,compétitivité,fuites de carbone, Emission trading, fuites de carbone, environment, compétitivité, 330, 338, 333, [ SDV.EE ] Life Sciences [q-bio]/Ecology, environment, output-based allocation, Economie de la terre et des ressources naturelles, [SDV.EE]Life Sciences [q-bio]/Ecology, L94, L51, [QFIN.GN] Quantitative Finance/General Finance, carbon leakage, [QFIN.GN]Quantitative Finance [q-fin]/General Finance [q-fin.GN], [SDV.EE] Life Sciences/Ecology, environment, 660, ajustement aux frontières, Q38, output‐based allocation, ECO] Sciences de l'Homme et Société/Economies et finances [[SHS], border adjustment, L61, jel: jel:Q54, jel: jel:Q58, jel: jel:L61, jel: jel:L51, jel: jel:L94, jel: jel:Q38

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