Carbon pricing and industrial competitiveness: Border adjustment or free allocation?
Cambridge Working Papers in Economics
Faculty of Economics, University of Cambridge
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Ritz, R. (2022). Carbon pricing and industrial competitiveness: Border adjustment or free allocation?. https://doi.org/10.17863/CAM.86219
To mitigate concerns about carbon leakage and industrial competitiveness, cap-and-trade systems have typically relied on the free allocation of carbon allowances to trade-exposed sectors. The European Union’s Green Deal raises the prospect of free allocation being replaced by a carbon border adjustment mechanism (CBAM) on imported products. This paper provides a simple framework to analyze the competitiveness support provided by these policy instruments. It shows how the rate of carbon leakage can be a “sufficient statistic” to determine the output and profit impacts of the switch to a CBAM. High-leakage sectors will prefer the CBAM while low-leakage sectors will prefer free allocation.
Cap-and-trade, carbon border adjustment, carbon leakage, industrial competitiveness
This record's DOI: https://doi.org/10.17863/CAM.86219
This record's URL: https://www.repository.cam.ac.uk/handle/1810/338812
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