Carbon Border Adjustment Mechanism and Free Allowances
Date / TimeMay 06, 2022 / 2:30-4:00pm
Brittney Van Der Werff
Public Relations Specialist, NM EPSCoR
Presenter: Stefan Ambec
Abstract: Carbon leakage is an obstacle to the implementation of carbon pricing, such as emission permit markets in a world open to trade. The greenhouse gas emission reduction induced domestically can be offset by a growing share of imported products with a higher carbon footprint. We investigate two policy instruments that aim at mitigating carbon leakage: free allowances and the Carbon Border Adjustment Mechanism (CBAM). We show that both instruments impact differently trade, emissions and welfare. Free allowances give a comparative advantage to the domestic firms whose abatement cost is lower than the revenue from their net position in the permit market. As a consequence, those firms are able to export, which reverses the leakage problem. In contrast, the CBAM makes imported products more expensive, which reduces trade. We identify the determinants of the economic outcomes with one of the two instruments or both under perfect and imperfect competition. We also characterize the optimal share of free allowances and optimal carbon price under the CBAM.
Bio: Stefan Ambec is INRAE Research Professor at Toulouse School of Economics where he leads the TSE Energy and Climate Center. He is Editor-in-Chief for Resource and Energy Economics. His research focuses on the impacts of environmental policies: about their efficiency, fairness properties, their effect on firms’ strategies, on the welfare of citizens, and their behavior. Topics include the energy transition, water use, air quality, and climate change.