Leakage from climate policies and border tax adjustment:lessons from a geographic model of the cement industry

Abstract

We present a spatial international trade model, GEO, which computes transportation costs bynot treating markets as dimensionless points and explicitly represents capacity shortages andinvestment decisions in new production capacities. We link it to CEMSIM, a partialequilibrium model of the world cement industry developed by the IPTS. We assume that theKyoto Protocol Annex B countries (except the USA and Australia), create a CO2 tax at 15euros per tonne. This policy entails significant emissions reductions (around 20%) in thesecountries. A significant leakage occurs, with an emissions increase in the rest of the world ofaround 20% of the emissions reduction in Annex B-USA&Australia. We thus run twoscenarios combining a CO2 tax with border-tax adjustments (BTA). With the more ambitiousBTA tested, not only is there no leakage, but emissions in the rest of the world decreaseslightly. However, compared to business-as-usual, non-Annex B price-competitiveness andproduction decrease a little and these countries loose some market shares, so they couldattack this system as distorting competition in favour of Annex B countries. A less ambitiousBTA is thus tested, which cannot be criticised on this ground and prevents almost all leakage.The only drawback of both BTA policies is that the cement price in Annex BUSA&Australia increases a little more than without BTA, further impacting the cementconsumers in these countries.Cement; leakag;, spillover; climate change mitigation;Kyoto Protocol; border-tax adjustment;international trade; transportation cost