Intensity-based Rebating of Emissions Pricing Revenues
This working paper examines the incentives created by two novel forms of rebating that reward emission intensity reductions.
Abstract
Carbon pricing policies worldwide are increasingly coupled with direct or indirect subsidies where emissions pricing revenues are rebated to the regulated entities, particularly for emission-intensive and trade-exposed firms. We analyze the incentives created by two novel forms of rebating that reward additional emission intensity reductions: one given in proportion to output (intensity-based output rebating, IBOR) and another that rebates a share of emissions payments made (intensity-based emissions rebating, IBER). We contrast them with more common approaches like output-based rebating (OBR), abatement-based rebating (ABR), or lump-sum rebating (LSR). Comparing revenue-neutral schemes, given the same emissions price, IBOR incentivizes the most intensity reductions, while ABR incentivizes the most output reductions, and OBR puts the least pressure on output (and emissions); IBER lies in between by implicitly subsidizing emissions while incentivizing intensity reductions. We supplement partial equilibrium theoretical analysis with numerical simulations to assess the performance of different mechanisms in a multisector general equilibrium model that accounts for economy-wide market interactions and accommodates the trade-off analysis between overall economic efficiency and sectoral performance indicators such as output or emission intensity.
