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Alternative approaches for levelling carbon prices in a world with fragmented carbon markets

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  • Lanzi, Elisa
  • Chateau, Jean
  • Dellink, Rob
Abstract
When carbon markets are fragmented and carbon prices vary across regions, concerns arise that acting countries may encounter competitiveness and welfare losses and changes in production may lead to carbon leakage. Border Carbon Adjustments (BCAs) have been proposed as a response measure to address these issues. However, more cooperative response policies, such as linking carbon markets, can also reduce the burden of emission reduction in acting countries and help level carbon prices. This paper analyses the effects of BCAs and both direct and indirect linking on welfare, competitiveness and carbon leakage within a global recursive-dynamic computable general equilibrium (CGE) model. Results illustrate that an uneven carbon pricing can indeed lead to substantial competitiveness and welfare losses for acting countries as well as to carbon leakage. Of the instruments investigated in this paper, BCAs appear to be the best measure to preserve the competitiveness of acting countries as they shift part of the burden of emission reductions to non-acting countries. While BCAs are effective for acting countries, they cause severe welfare and competitiveness losses for non-acting countries. As a result, BCAs are less effective than linking in reducing global welfare losses, as linking tends to be beneficial for both acting and non-acting countries. The advantages of BCAs diminish as the carbon market is extended to more emission sources or to a wider international participation.

Suggested Citation

  • Lanzi, Elisa & Chateau, Jean & Dellink, Rob, 2012. "Alternative approaches for levelling carbon prices in a world with fragmented carbon markets," Energy Economics, Elsevier, vol. 34(S2), pages 240-250.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:s2:p:s240-s250
    DOI: 10.1016/j.eneco.2012.08.016
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    4. Böhringer, Christoph & Balistreri, Edward J. & Rutherford, Thomas F., 2012. "The role of border carbon adjustment in unilateral climate policy: Overview of an Energy Modeling Forum study (EMF 29)," Energy Economics, Elsevier, vol. 34(S2), pages 97-110.
    5. Beck, Ulrik R. & Kruse-Andersen, Peter K. & Stewart, Louis B., 2023. "Carbon leakage in a small open economy: The importance of international climate policies," Energy Economics, Elsevier, vol. 117(C).
    6. Felbermayr, Gabriel & Peterson, Sonja & Wanner, Joschka, 2022. "The impact of trade and trade policy on the environment and the climate: A review," Kiel Working Papers 2233, Kiel Institute for the World Economy (IfW Kiel).
    7. Branger, Frédéric & Quirion, Philippe, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Ecological Economics, Elsevier, vol. 99(C), pages 29-39.
    8. Lian-Biao Cui & Ma-Lin Song, 2017. "Designing and Forecasting the Differentiated Carbon Tax Scheme Based on the Principle of Ability to Pay," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-25, February.
    9. Sun, Ya-Fang & Su, Bin & Zhong, Sheng & He, Junyi & Yu, Shiwei, 2024. "Determinants of Aggregated Embodied Carbon Intensity in Global Bilateral Exports by Firm Heterogeneity," Ecological Economics, Elsevier, vol. 218(C).
    10. Song, Yazhi & Liu, Tiansen & Li, Yin & Zhu, Yue & Ye, Bin, 2022. "Paths and policy adjustments for improving carbon-market liquidity in China," Energy Economics, Elsevier, vol. 115(C).
    11. Jared C. Carbone & Nicholas Rivers, 2014. "Climate policy and competitiveness: Policy guidance and quantitative evidence," Working Papers 2014-05, Colorado School of Mines, Division of Economics and Business.
    12. Dong, Yanli & Ishikawa, Masanobu & Hagiwara, Taiji, 2015. "Economic and environmental impact analysis of carbon tariffs on Chinese exports," Energy Economics, Elsevier, vol. 50(C), pages 80-95.
    13. Paroussos, Leonidas & Fragkos, Panagiotis & Capros, Pantelis & Fragkiadakis, Kostas, 2015. "Assessment of carbon leakage through the industry channel: The EU perspective," Technological Forecasting and Social Change, Elsevier, vol. 90(PA), pages 204-219.
    14. Babatunde, Kazeem Alasinrin & Begum, Rawshan Ara & Said, Fathin Faizah, 2017. "Application of computable general equilibrium (CGE) to climate change mitigation policy: A systematic review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 78(C), pages 61-71.
    15. Hagen, Achim & Schopf, Mark, 2024. "Political influence on international climate agreements with border carbon adjustment," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    16. Chang, Kai & Chen, Rongda & Chevallier, Julien, 2018. "Market fragmentation, liquidity measures and improvement perspectives from China's emissions trading scheme pilots," Energy Economics, Elsevier, vol. 75(C), pages 249-260.
    17. Weitzel, Matthias & Peterson, Sonja, 2012. "Border carbon adjustment: Not a very promising climate policy instrument," Kiel Policy Brief 55, Kiel Institute for the World Economy (IfW Kiel).
    18. Stephan Schott, 2013. "Carbon Pricing Options for Canada," Canadian Public Policy, University of Toronto Press, vol. 39(s2), pages 109-124, August.

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    More about this item

    Keywords

    Climate mitigation policy; Competitiveness; Carbon leakage; General equilibrium;
    All these keywords.

    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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