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We explore the macroeconomic and distributional impacts of unilateral carbon pricing in Austrian economic sectors, which are not covered by the EU emission trading scheme ETS, under various assumptions of revenue usage. We use a recursive-dynamic computable general equilibrium model with twelve groups of private households, differentiated by income quartile and location of residence. Pricing of non-ETS CO2 emissions without any targeted compensation of households turns out to be progressive (when measured in equivalent variation, or welfare) with households living in the periphery being affected the most. This outcome is explained by the dominating progressive factor income effect, which works against regressive consumer price impacts. Considering the positive contribution to welfare from increased public goods provision, low-income households are even better off than without carbon pricing. We compare the revenue usage options ‘no targeted compensation’ with either unconditional or revenue-neutral ‘eco-bonus per capita payments’ as well as revenue-neutral cuts in either ‘labor tax rates’ or ‘value added tax rates.’ We discuss our results from a Utilitarian, Rawlsian and polarization-averse equity perspective. Applying equal weights to the criteria ‘environmental effectiveness’, ‘cost effectiveness’, ‘public budget’ and ‘welfare’, Rawlsian decision makers would prefer the no targeted compensation option. Otherwise, the revenue usage option of revenue-neutral cuts in labor tax rates balance best investigated multiple criteria.

Climate policy arrangements of partial regional coverage, as they seem to emerge from the UNFCCC process, might lead to carbon leakage and hence a broad literature has developed to quantify leakage. Most of these analyses, however, are confined to consider emissions from fuel combustion only. Yet, some of the most relevant simultaneously energy intensive and internationally trade exposed sectors are also subject to substantial emissions from industrial processes. Carbon dioxide emissions can be released in industrial processes which physically or chemically transform materials. In the steel and cement sectors, for example, these process emissions amount to about half of sector carbon dioxide emissions in many countries. We incorporate industrial process emissions based on UNFCCC data into a multi-sectoral multi-regional computable general equilibrium model and analyze the implications of a unilateral EU 20% carbon dioxide emission reduction policy on leakage and the effectiveness of border carbon adjustment in reducing leakage. By comparing the results to a model without process emissions, we find that leakage of climate policy so far has been underestimated. Leakage turns out to be higher when process emissions are correctly accounted for (38% instead of 29% for combustion emissions only). Conversely, border carbon adjustment measures are found to be roughly twice as effective to reduce leakage rates, when process emissions are correctly accounted for — as carbon adjustment rates are more directly targeted to the relevant sectors. Yet, border carbon adjustment measures should not be seen as a panacea as they might impede necessary technological carbon-free innovation, unless they are phased out over time.