Good COP, Bad COP

Carbon leakage
by -- December 10th, 2009

Addressing carbon leakage and international competitiveness in the EU and US.

A country (or, perhaps, a Union) that adopts a unilateral climate policy faces a problem with international trade. Emissions-intensive, trade-exposed firms are concerned that their international competitors will not face a carbon price. They will be able to produce goods more cheaply and import them into the US, thus hurting US EITE firms. Environmental groups are concerned that this amounts to emissions leakage – emissions are not reduced, they just move overseas.

There are two basic ways to address this – freely allocating permits to US firms to help their bottom lines, and border adjustment mechanisms. In a border adjustment mechanism, imports are charged based on the greenhouse gas emissions embodied in their production.

Either approach faces the same problem – how big should the allocation (or adjustment) be? Equivalently, how much carbon is in the product? For products categories such as bulk aluminum, this is a reasonable calculation. However, some product categories (my favorite is “other inorganic chemicals”) cover many different products with very different carbon emissions. Using an average or benchmark measure for those categories would not be appropriate, as it would disadvantage the carbon-intensive products and thus not solve the problem at all.

The European Commission official in charge of their border adjustment program explained to me that they used category-level benchmarks whenever appropriate, and did random product-level audits of the handful of other categories. Simple and ingenious.

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