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

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  • Christoph Böhringer
  • Brita Bye
  • Taran Fæhn
  • Knut Einar Rosendahl
Abstract
We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency. Remboursement des taxes sur le carbone sur la base de la production selon les taxes sur le carbone dans l'arrière‐cour du voisin: compétitivité, coulage, et bien‐être. On examine comment, dans une économie ouverte, des taxes sur le carbone combinées à des remboursements basés sur la production (RBP) se définissent en interaction avec les politiques sur le carbone d'un grand partenaire commercial voisin. Les résultats analytiques suggèrent que, quel que soit l'objectif de la politique de RBP (compenser pour le fardeau des taxes sur la carbone ou maximiser le bien‐être compte tenu de la mission globale de réduction des émissions), le taux RBP devrait être positif dans les cas pertinents au plan de la politique publique. Des simulations numériques faites pour le Canada et les États‐Unis, son grand partenaire commercial voisin, montrent que l'impact des politiques américaines sur le taux RBP va dépendre fondamentalement de l'objectif des politiques RBP du Canada. Si, pour une politique américaine de carbone donnée, le but du Canada est de restaurer la compétitivité des firmes domestiques à forte intensité d'émissions et exposées au commerce international (FIEECI) au même niveau qu'elle était avant l'imposition de sa propre taxe sur le carbone, on montre que les taux domestiques nécessaires de RBP vont être insensibles aux politiques de carbone étrangères. Cependant, si non seulement des taxes sur le carbone au Canada sont mises en place mais que des taxes aussi élevées sont imposées aux États‐Unis, les taux RBP canadiens compensatoires vont être jusqu'à 50 % plus bas selon les secteurs et la politique de RBP des États‐Unis. Si l'objectif de la politique est d'accroître l'efficacité de l'allocation des ressources dans l'économie dans son ensemble (l'effet de bien‐être) des politiques canadiennes en tenant compte du coulage de carbone, les politiques américaines vont exercer une pression mineure à la baisse sur les taux désirables de RBP au Canada. Les choix pratiques de taux de RBP vont à peine affecter la performance agrégée de l'économie domestique – donc les RBP se qualifient comme un instrument compensatoire pour les industries à forte intensité d'émissions et exposées au commerce international, sans un grand sacrifice en termes d'efficacité dans l'allocation des ressources de l'économie dans son ensemble.

Suggested Citation

  • Christoph Böhringer & Brita Bye & Taran Fæhn & Knut Einar Rosendahl, 2017. "Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness, leakage and welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(2), pages 426-455, May.
    • Handle: RePEc:wly:canjec:v:50:y:2017:i:2:p:426-455
    DOI: 10.1111/caje.12264
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    as
    1. Zhang, Zhong Xiang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," International Review of Environmental and Resource Economics, now publishers, vol. 6(3), pages 225-287, December.
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    Cited by:

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    2. Jia, Zhijie & Wu, Rongxin & Liu, Yu & Wen, Shiyan & Lin, Boqiang, 2024. "Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?," Ecological Economics, Elsevier, vol. 220(C).
    3. Kaushal, Kevin Raj, 2018. "Emission price, output-based allocation and consumption tax: Optimal climate policy in the presence of another country’s climate policy," Working Paper Series 8-2018, Norwegian University of Life Sciences, School of Economics and Business.
    4. Rausch, Sebastian & Zhang, Da, 2018. "Capturing natural resource heterogeneity in top-down energy-economic equilibrium models," Energy Economics, Elsevier, vol. 74(C), pages 917-926.
    5. William Wills & Emilio Lebre La Rovere & Carolina Grottera & Giovanna Ferrazzo Naspolini & Gaëlle Le Treut & F. Ghersi & Julien Lefèvre & Carolina Burle Schmidt Dubeux, 2022. "Economic and social effectiveness of carbon pricing schemes to meet Brazilian NDC targets," Post-Print hal-03500923, HAL.
    6. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.

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    More about this item

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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