Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?

33 Pages Posted: 11 Sep 2008

See all articles by Viktoria Alexeeva-Talebi

Viktoria Alexeeva-Talebi

ZEW – Leibniz Centre for European Economic Research

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

Tim Mennel

ZEW – Leibniz Centre for European Economic Research; University of Bonn

Date Written: 2008

Abstract

In the absence of an international agreement on climate policy, unilateral carbon abatement creates two problems: It tends to have a detrimental effect on domestic competitiveness, and it leads to an increase in carbon emissions abroad (leakage). This paper analyses two policies that have recently been proposed to mitigate these problems: Border tax adjustments (BTA) and integrated emission trading (IET). The former policy levies a quantity-based, the latter an emission based duty on imports from non-abating countries. In a stylised two-country model we demonstrate that the policies address both problems. However, BTA protects domestic competitiveness more effectively, while IET achieves a greater reduction in foreign emissions. A computational general equilibrium analysis of the unilateral abatement policy adopted by the European Union confirms our theoretical insights for the sectors covered by the offsetting measures. However, the implications for the competitiveness of noncovered sectors are negative. These two effects constitute the central trade-off in the implementation of both policies.

Keywords: Border Tax Adjustments, Climate Policy, Competitiveness, Emission Trading

JEL Classification: D58, F18, H23, Q48

Suggested Citation

Alexeeva-Talebi, Viktoria and Löschel, Andreas and Mennel, Tim, Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading? (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-061, Available at SSRN: https://ssrn.com/abstract=1266084 or http://dx.doi.org/10.2139/ssrn.1266084

Viktoria Alexeeva-Talebi (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

Tim Mennel

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

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