Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/192804
Authors: 
Storrøsten, Halvor Briseid
Böhringer, Christoph
Rosendahl, Knut Einar
Year of Publication: 
2015
Series/Report no.: 
Discussion Papers 822
Abstract: 
Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions with no or more lenient emission regulation. Both analytical and numerical studies suggest that emission pricing combined with border carbon adjustment is a second-best instrument, and more cost-effective than output-based rebating, in which case domestic output is indirectly subsidized. No country has so far imposed border carbon adjustment, while variants of output-based rebating have been implemented. In this paper we show that combining output-based rebating for emission-intensive and trade-exposed goods with a consumption tax on the same goods can be equivalent with border carbon adjustment. Moreover, we demonstrate that it is welfare improving for a region which has already implemented emission pricing along with outputbased rebating to also introduce such a consumption tax. We conclude that supplementing outputbased rebating with a consumption tax constitutes smart hedging against carbon leakage: Compared to output-based rebating stand-alone it constitutes a robust strategy for improving cost-effectiveness of unilateral climate policy; compared to border carbon adjustment it limits the risks of potentially detrimental trade disputes.
Subjects: 
Carbon leakage
output-based rebating
border carbon adjustment
consumption tax
JEL: 
D61
H2
Q54
Document Type: 
Working Paper
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