Climate Clubs, Competitiveness Concerns, and Alternative Correction Measures
In this working paper, the authors explore how ambitious climate goals impact costs and competitiveness for countries in a climate club, looking at how tax rebates and carbon border adjustments play out in different club setups.
Abstract
The aim of this paper is to analyze the domestic costs and international competitiveness effects of ambitious mitigation targets implemented by a club of abating countries facing groups of potential free riders. The club can adopt two alternative measures to even the playing field for its energy-intensive trade-exposed (EITE) sectors: a tax rebate to firms, and carbon border adjustment mechanisms (CBAMs). Different club configurations are considered. Initially they include the European Union only and then progressively expand to other member countries of the Organisation for Economic Cooperation and Development (OECD), China, and India. We show that the club membership is much more influential than the use of border adjustments or rebates in determining the aggregated policy costs. However, both measures are effective at the sectoral level. We find that OECD countries’ firms would prefer protection by CBAMs, while China and India would favor rebates. This depends on the size of the club when China and India join and on their role as sellers of emission reduction permits within the club. We also show that CBAMs and rebates can shift the policy burden to non-protected sectors with possible (though moderate) net efficiency losses.
Authors
Ramiro Parrado
Scientist, European Institute on Economics and the Environment
Francesco Bosello
Principal Scientist, European Institute on Economics and the Environment
