Output-based allocation of emissions permits for mitigating the leakage and competitiveness issues for the Japanese economy

Abstract

The adoption of domestic emissions trading schemes (ETS) can impose a heavy burden on energy-intensive industries. Particularly, energy-intensive industries competing with foreign competitors could lose their international edge. Although the abatement of CO2 emissions in industrialized countries entails the reduction of their energy-intensive production, a corresponding increase in the production of energy-intensive goods in countries without CO2 regulations may lead to carbon “leakage.” This paper examines the effects of various allocation methods of emissions permits in the Japanese ETS on the economy and CO2 emissions using a multiregional and multisector computable general equilibrium model. Specifically, we apply the Fischer and Fox (Land Econ 83(4):575–599, 2007) model to the Japanese economy to address carbon leakage and competitiveness issues. We compare auction schemes, grandfathering schemes, and output-based allocation (OBA) schemes. We further extend the model by examining a combination of auctions and OBA. Though the auction scheme is found to be the best in terms of macroeconomic impacts, the leakage rate is high and the harm to energy-intensive sectors can be significant. OBA causes less leakage and damage to energy-intensive sectors, but the macroeconomic impact is undesirable. Considering all three effects—leakage, competitiveness, and macroeconomics—we find that combinations of auctions and OBA are desirable.

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Notes

  1. 1.

    However, it must be noted that the targets of reductions in the first (2005–2007) and second (2008–2012) phases of the EU ETS are limited to sectors such as manufacturing and the energy conversion sector.

  2. 2.

    See Bovenberg and Goulder (2002) for a detailed discussion of the tax interaction effect (and the revenue-recycling effect).

  3. 3.

    Planned to begin with the third phase, starting in 2013.

  4. 4.

    In fact, they compared a revenue-neutral carbon tax (reducing taxes on labor) with emissions trading through gratis allocation. However, the former policy was equivalent to the revenue-neutral auction-based emissions trading (reducing taxes on labor).

  5. 5.

    The supplementary document describing the model structure in detail is available from the authors upon request.

  6. 6.

    Note that overall leakage estimates can be sensitive to fuel supply elasticities (Burniaux and Martins 2000). The results of a sensitivity analysis on these elasticities will be avaiale upon request.

  7. 7.

    The estimated share of leisure time in total available time is 58.5 %, and the estimated labor tax rate is 50 % in the net term (33 % in the gross term).

  8. 8.

    Note that emission coefficient in our numerical model is not constant because firms use different types of fossil fuels, which do not have the same emission factor, changing the input combinations of the fossil fuels would change the output emission intensity. The model in this subsection is simplified for the illustrative purpose.

  9. 9.

    Some studies assume that permit allocations among sectors are based on OBA (their output shares) as well. See Böhringer and Lange (2005).

  10. 10.

    The carbon leakage rate is defined as the ratio of total additional CO2 emissions in regions other than Japan to total CO2 emissions abated by Japan. For example, when the decrease in CO2 emissions by Japan of 1 MtCO2 leads to the increase in CO2 emissions by the non-abating countries of 0.3 MtCO2, the leakage rate is 30 %.

  11. 11.

    This leakage rate can be measured with the ratio of the increase in emissions from each sector in foreign countries to the decrease of CO2 in the same sector of the Japanese economy.

  12. 12.

    Numerical results of impacts on export and import are available from the authors upon request.

  13. 13.

    In this scenario, the emission reduction target of the Japanese economy is reduced in OBA because of the smaller leakage rate. Overall, the effect is reduced. The ranking of the allocation methods, however, does not change. The difference across various allocation methods becomes smaller. One can also point out that the burden on EITE is reduced as expected.

  14. 14.

    The complete results of the sensitivity analysis are available from the authors upon request.

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Acknowledgments

We appreciate the financial support from the Center for Global Partnership, Japan Foundation, Mitsui & Co., Ltd. Environment Fund, the ENTWINED program of the Mistra Foundationm and JSPS KAKENHI Grant Number 22330099. The content herein is the sole responsibility of the authors and does not represent an official position of their organizations.

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Correspondence to Toshi H. Arimura.

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Takeda, S., Arimura, T.H., Tamechika, H. et al. Output-based allocation of emissions permits for mitigating the leakage and competitiveness issues for the Japanese economy. Environ Econ Policy Stud 16, 89–110 (2014). https://doi.org/10.1007/s10018-013-0072-8

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Keywords

  • Climate change
  • Emissions trading
  • Output-based allocation
  • International competitiveness
  • Carbon leakage

JEL Classification

  • C68
  • D42