The economics of carbon leakage mitigation policies

Stefan Ambec (1, 2) , Federico Esposito (3) , Antonia Pacelli (1, 4)

1 TSE-R - Toulouse School of Economics
2 INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
3 Tufts University [Medford]
4 University of Naples Federico II = Università degli studi di Napoli Federico II

In a trade model with endogenous emissions abatement, we investigate the impact of three policy instruments aimed at mitigating carbon leakage: free emission allowances, a Carbon Border Adjustment Mechanism (CBAM), and a CBAM with export rebates. We show that providing free allowances does not alter the incentives to abate carbon emissions, but, instead fosters the entry of more carbon intensive producers. This “levels the playing field” both domestically and internationally, and may even reverse carbon leakage. In contrast, a CBAM only levels the playing field domestically, and may lead to an autarky equilibrium. To reverse carbon leakage, a CBAM must be complemented with export rebates. We further show that a CBAM and export rebates improve welfare for any carbon price, and we identify the optimal share of free allowances with or without a CBAM. Finally, we perform a calibration exercise on cement and steel sectors to simulate the effects of the CBAM recently adopted by the European Union. Our model predicts a scenario with reverse carbon leakage and significant welfare gains for both sectors.

Mots clés: Carbon pricing; Trade; Carbon leakage; CBAM; Free allowances; Export rebates

Domaines: Economies et finances; Environnement et Société

Stefan Ambec, Federico Esposito, Antonia Pacelli. The economics of carbon leakage mitigation policies. Journal of Environmental Economics and Management, 2024, 125, pp.102973. ⟨10.1016/j.jeem.2024.102973⟩. ⟨hal-04550380⟩