Cost-Effective Unilateral Climate Policy Design: Size Matters

Abstracts with downloadable Discussion Papers in PDF are available on the Internet: http://www.ssb.noAbstract: Given the bleak prospects for a global agreement on mitigating climate change, pressure for unilateral abatement is increasing. A major challenge is emissions leakage. Border carbon adjustments and output-based allocation of emissions allowances can increase effectiveness of unilateral action but introduce distortions of their own. We assess antileakage measures as a function of abatement coalition size. We first develop a partial equilibrium analytical framework to see how these instruments affect emissions within and outside the coalition. We then employ a computable general equilibrium model of international trade and energy use to assess the strategies as the coalition grows. We find that full border adjustments rank first in global cost-effectiveness, followed by import tariffs and output-based rebates. The differences across measures and their overall appeal decline as the abatement coalition grows. In terms of cost, the coalition countries prefer border carbon adjustments; countries outside the coalition prefer output-based rebates. ___Keywords: emissions leakage, border carbon adjustments, output-based allocationSupport from the Research Council of Norway’s RENERGI program, the German Research Foundation (BO 1713/5-1), and the Mistra Foundation’s Environment and Trade in a World of Interdependence (ENTWINED) program is gratefully acknowledged