Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates

Abstract

We explore conditions determining which anti-leakage policies might be more effective complements to domestic greenhouse gas emissions regulation. We consider four policies that could be combined with unilateral emissions pricing to counter effects on international competitiveness: a border charge on imports, a border rebate for exports, full border adjustment, and domestic output-based rebating. Each option faces different potential legal hurdles in international trade law; each also has different economic impacts. While all can support competitiveness, none is necessarily effective at reducing global emissions. Nor is it possible to rank order the options; effectiveness depends on the relative emissions rates, elasticities of substitution, and consumption volumes. We illustrate these results with simulations for the energy-intensive sectors of three different economies, the United States, Canada and Europe. Although most controversial, full border adjustment is usually most effective, but output-based rebating for key manufacturing sectors can achieve many of the gains.