«Christoph Böhringera and Victoria Alexeeva-Talebib a University of Oldenburg b Centre for European Economic Research, Mannheim Emails: ...»
Notwithstanding, it also becomes obvious that emission pricing in favour of EITE industries is only a weak instrument to counteract leakage since the main part of leakage comes from fossil fuel reduction which is more or less fixed through the global emission reduction target. Figure 10 confirms the poor performance of differential emission pricing as a second-best strategy compared to uniform emission pricing across all segments of the domestic economy. The domestic compliance cost for the EU to achieve a given global emission reduction through unilateral abatement is very likely to increase with non-uniform emission pricing, i.e. the gains from reduced leakage are more than offset through the increase in additional direct abatement cost for the case of differential emission pricing.6 Figure 10: Changes in the EU real consumption (% from BaU) in the case of leakage compensation 0,2 0,0
Finally, our results show that non-uniform pricing strategy offers some prospects for improving global cost-effectiveness of unilateral emission reduction actions in Europe. Centring the discussion around global instead of regional (European) welfare perspective, Figure 11 demonstrates that moderate carbon price differentiation (up to factor 5 in favour of EITE industries) slightly reduces losses in global real consumption compared with a simple rule of uniform emission pricing. Gains from reduced leakage and improved terms of trade in non-abating regions are sufficient in magnitude to offset the increase in additional direct abatement cost for the case that Europe pursues climate policy with some degree of preferential treatment in favour of EITE industries.7 In the numerical simulations reported in Figure 10 there is only one exception for the case of high emission reduction targets and moderate preferential treatment of EITE industries.
They are mirror-inverted to the EU implications (compare Figure 7).
Figure 11: Changes in global real consumption (% from BaU) 0,00
In response to the challenges posed by climate change and the lack of a global greenhouse gas reduction treaty, individual OECD countries are in the process of legislating unilateral emission reduction strategies.
As a primary example, the European Union has already committed itself to substantial unilateral greenhouse emissions reductions within the EU Climate and Energy Package. The prospect of rising carbon prices however fosters concerns on adverse competitiveness impacts for domestic energy-intensive and trade-exposed (EITE) industries compared to foreign competitors that are not constrained by comparable regulation. These competitiveness concerns joint with the potential for emission leakage provide the background for preferential treatment of EITE industries in unilateral climate policy legislation. While the climate policy debate is very much dominated by the issue of “competitiveness”, it misses a rigorous clarification of competitiveness notions and a comprehensive impact assessment of policy proposals that respond to competitiveness concerns of particular industries.
In this paper, we have first discussed alternative indicators that can be used to quantify specific aspects of competitiveness at the level of sectors and countries. We subsequently have elaborated on a computable general equilibrium model complemented with selected competitiveness indicators to facilitate the comprehensive impact assessment of EU leadership in climate policy. In order to reinforce industrial competitiveness, price discrimination in favour of EITE sectors is warranted. Notwithstanding, our analysis has clearly revealed potential trade-offs to be faced by European policy makers narrowly focusing on competitiveness concerns about energy-intensive and trade-exposed branches. In particular, the sectorspecific gains of preferential regulation in favour of these branches must be trade-off against the additional burden imposed on other industries to meet an economy-wide emission reduction target. The concomitant effect is that marginal benefits of improved economy-wide terms of trade in a large open economy such as the EU pursuing unilateral climate actions decrease with differential emission pricing in favour of EITE industries. Sectoral competitiveness of those branches in turn is directly linked to and largely driven by changes in terms of trade which work predominantly through adjustments on international fuel markets.
Via this channel carbon price discrimination has adverse repercussions for energy-intensive and tradeexposed branches facing higher energy prices on international markets as under uniform pricing rule.
Beyond this horizon, our results highlight the scope for substantial excess cost in emission reduction in the EU as price discriminating policy grants lower carbon levies to EITE industries and thereby foregoes relatively cheap abatement options in these sectors.
Krugman (1994) has condemned the obsession with competitiveness as “both wrong and dangerous”. Our assessment of competitiveness issues in unilateral climate policy is somewhat more differentiated. The notion of competitiveness at the sectoral level should not be mixed up with the broader issue of structural change towards a low-carbon economy. The commitment to reduce emissions in a cost-effective manner shifts comparative advantage towards emission-extensive industries which makes the loss in competitiveness of emission-intensive branches rather a desired feature than a feared outcome of rational climate policy. Competitiveness concerns of emission-intensive and trade-exposed industries are legitimate to the extent that competing firms abroad face an undue comparative advantage because of a lack of comparable regulation. However, second-best responses to the problem of emission leakage must be carefully assessed. Despite the potential pitfalls of price differentiation at the regional level (EU), our findings lower concerns on these pricing strategies when global cost-effectiveness is taken into consideration: The moderate non-uniform emission pricing which is erected to protect energy-intensive and trade-exposed industries in the EU will barely hurt global real consumption, while it will to some extent enhance environmental effectiveness of unilateral actions.
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