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Environmental and Resource Economics

, Volume 56, Issue 1, pp 47–72 | Cite as

Between a Rock and a Hard Place: A Trade-Theory Analysis of Leakage Under Production- and Consumption-Based Policies

  • Michael JakobEmail author
  • Robert Marschinski
  • Michael Hübler
Article

Abstract

Without a comprehensive global climate agreement, carbon leakage remains a contentious issue. Consumption-based pricing of emissions—which could in practice be implemented with a full border tax adjustment (BTA)—has been forwarded as an option to increase the effectiveness of unilateral climate policy. This paper questions the economic rationale behind this approach, using a theoretical \(2 \times 2\) trade model in which leakage occurs through terms-of-trade effects. We show analytically, first, that consumption-based pricing of emissions does not necessarily result in less leakage than production-based policies. Second, the sign of the optimal unilateral carbon tariff depends on the carbon-intensity differential between the foreign country’s exporting and non-exporting sectors, and not on the differential between home’s and foreign’s exporting sectors, as implied by the full BTA approach. Third, based on empirical data for the year 2004, our model implies that full BTA applied by the European Union on e.g. imports from and exports to China would—by shifting China’s production from the export sector with a relatively low carbon-intensity towards the more carbon-intensive non-export sector—actually increase leakage.

Keywords

Leakage Carbon tariff Consumption-based emission policy  Border tax adjustment Climate policy 

JEL Classification

F11 F18 Q54 Q56 

Notes

Acknowledgments

We are very grateful for receiving comments from Lydia Blaschtschak, Cameron Hepburn, and Philippe Quirion, two anonymous reviewers and the editor Hassan Benchekroun on earlier versions of this paper, which helped to considerably improve the manuscript. Funding from the German Federal Ministry of Education and Research (BMBF) within the Call ‘Ökonomie des Klimawandels’ (funding code 01LA1121A—‘CREW’ and funding code 01LA1105B—‘CliPoN’) is gratefully acknowledged.

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  • Michael Jakob
    • 2
    • 1
    Email author
  • Robert Marschinski
    • 1
    • 3
  • Michael Hübler
    • 4
  1. 1.Potsdam Institute for Climate Impact ResearchPotsdamGermany
  2. 2.Mercator Research Institute on Global Commons and Climate Change (MCC)BerlinGermany
  3. 3.Technische Universität BerlinBerlinGermany
  4. 4.Zentrum für Europäische WirtschaftsforschungMannheimGermany

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