Nova workboard

a blog from young economists at Nova SBE

Potential Policies to solve Carbon leakage problem

In recent decades, the international scientific community has come to the agreement that greenhouse gas emissions produced by human activities, affect after all the climate. With the signature of the Kyoto Protocol in December 1997, most of the industrialized countries committed to reduce their greenhouse gas emissions. However, in March 2001 US decided not to confirm the Protocol.
The decision was justified by the fact that the Protocol was not in US’s economic interest since other developing countries, like China and India, responsible for “new emissions”, have not signed the protocol either. The efforts to diminish CO2 could raise production costs, diminishing this way the American firms’ competitiveness. Moreover, since the Protocol is not of overall acceptance he desired outcome is quite uncertain. It is a fact that the countries, who signed the Protocol, did reduce their emissions; but on the other hand, the countries which are not in agreement could increase their emission even more. This phenomenon is defined as “carbon leakage” .
In order to reduce emissions without stirring more the phenomenon of carbon leakage, countries should design a specific policy. Such was the implementation designed for the “dirty goods” exporters, who produce the most emissions. This policy is constituted by two parts: the first involves a taxation on “dirty goods” production (The GATT Working Group on Border Tax Adjustments, 1970) while the second one focused on the subsidization of “clean goods” consumption. With dirty goods, we refer to goods that produce more pollution than a certain threshold; instead, we consider as clean goods, the more environmentally friendly products. I assume that the tax revenue allows for the financing of the subsidization without the need of other public funds.
This is defined as carbon tax and the equilibrium is reached in this way: price is determined directly by the regulators through the tax rate, while quantity of emissions to be reduced is the result of measures adopted by the industries in order to reduce their emissions.
It is hard to decide in advance the amount of the subsidy, since the preferences of the consumers can be very diverse and unpredictable. The decrease in dirty goods consumption, and hence a loss in welfare, can be compensated by both an increase in consumption of clean goods and the life improvement that comes by a less polluted world.
If we take into account the impact on export of dirty goods, another way to mitigate this is Border tax adjustment (BTA) – which means imposing corresponding charges on imports, instead of burdening the carbon price of exports.” The benefit of this policy is mitigating domestic consumption without affecting international competitiveness.
This type of policy has the advantage of not needing international cooperation, which, as many real life examples show us, is very hard to achieve. However, international cooperation could still contribute greatly in implementing the national policies regarding carbon consumption control. “Equalizing marginal abatement costs across countries (by imposing a uniform emissions price) minimizes the costs of emission reductions. Moreover, cooperation reduces the risk of industry relocation and carbon leakage. Thus, international cooperation raises the chance that governments collect significant revenue from carbon pricing policies.

Pasquale Pellegrino


Author: studentnovasbe

Master student in Nova Sbe

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