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

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EU_ETS_and_carbon_leakage_092010.pdf (469.7Kb)
Date
2011-09
Dewey
Economie de la terre et des ressources naturelles
Sujet
Emission trading; border adjustment; output‐based allocation; competitiveness; carbon leakage
JEL code
Q38; Q58; Q54; L94; L61; L51
Journal issue
Ecological Economics
Volume
70
Number
11
Publication date
09-2011
Article pages
1957-1971
Publisher
Elsevier
DOI
http://dx.doi.org/10.1016/j.ecolecon.2011.04.020
URI
https://basepub.dauphine.fr/handle/123456789/7346
Collections
  • LEDa : Publications
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Author
Monjon, Stéphanie
Quirion, Philippe
Type
Article accepté pour publication ou publié
Abstract (EN)
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.

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