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While the EU is working toward the implementation of the world's first Carbon Border Adjustment (CBA) Mechanism, a gap remains between the ways in which carbon leakage and CBAs are discussed in policy spheres and economic evidence on these topics. The aim of this paper is to bridge this gap by presenting the EU's policy context, systematically reviewing the economic literature on carbon leakage and CBAs, and discussing potential future research avenues. Three channels of leakage are identified in our literature review: the competition, energy and innovation channels. The main finding of this paper is that while the competition channel is well understood and taken into account by policymakers, the energy and innovation channels are generally not considered. Policy recommendations are provided to better account for these two channels. [ABSTRACT FROM AUTHOR]

In July 2016, the European Commission presented its proposal for a regulation to reduce greenhouse gases emissions in sectors not covered by the emissions trading system with regard to post-2020 binding targets. The proposal extends the burden-sharing framework designed in 2008. This new burden-sharing, called by the European Commission as the Effort Sharing Regulation, is based on a GDP per capita rule and aims to reflect the economic capacity of each European Member State on the basis of its relative wealth. However, several papers have pointed out that this way of allocating emissions can result in great cost-inefficiencies, as the allocations do not take Member State abatement costs into account. The proposal acknowledges this issue and proposes a range of flexibility instruments (i.e., more than 15 flexibility options) that intend to enhance cost-effectiveness. This paper evaluates the proposal and analyzes the economic impacts of each flexibility option with respect to fairness and cost-effectiveness using a computable general equilibrium model. The performed analysis demonstrates that flexibility mechanisms that allow "inter-Member state flexibility" constitute the most efficient options. Specifically, they reduce compliance costs and, simultaneously, increase fairness between low-income Member States and high-income Member States. [ABSTRACT FROM AUTHOR]

By adopting the Paris Agreement on climate change, the world community has agreed on global goals for climate policy. However, by relying on voluntary contributions and respecting 'national circumstances', it does not ensure efficient and equitable country policies. To derive guidelines for a fair burden sharing between countries, the paper applies welfare theory and combines it with the general equity principles. The procedure selects those 'national circumstances' which are suitable for internationally acceptable policies. The concept is then compared to policies formulated by purely selfish countries. A convergence process closing the gap between country contributions and the optimum international climate policy is developed. It is argued that equity-based signals can be a forceful means supporting this process. [ABSTRACT FROM AUTHOR]

A growing body of literature from the natural and the social sciences indicates that the rate of temperature increase is another key driver of total climate damages, next to the absolute increase in temperature compared to the pre-industrial level. Nonetheless, the damage functions employed in integrated assessment models that aim at studying the economics of climate change usually are based solely on the absolute temperature increase. Hence, these models neglect additional damages that will occur if the rate of temperature increase exceeds a certain threshold that overstrains the adaptive capacities of ecological and social systems. In the present paper, we implement such rate-related damages in the well-known integrated assessment model DICE-2016R. Using the resulting model variant DICE-RD, we show for several scenarios that an insufficient climate policy that ignores rate-related damages can lead to substantial economic losses. [ABSTRACT FROM AUTHOR]

This paper provides a model-based macroeconomic assessment of First-Mover Advantage (FMA) in environmental technologies, in which a European sector becomes world leader and captures the global market for a particular technology. The E3MG model is used to assess a set of scenarios where the FMA is established in a range of renewable technologies. Although to some extent dependent on scenario assumptions, the model results show that FMA could provide a small but noticeable boost to European GDP (of some 0.5 %) and employment, which could go some way to countering possible losses in production from implementing ambitious climate policy. The impacts are found to be temporary in nature, but some of the sectors that benefit the most are also those that could be expected to lose out from higher energy prices. [ABSTRACT FROM AUTHOR]

Recent Conferences of the UNFCCC Parties (COP) emphasized international technology funding as a means of achieving carbon emissions reductions in developing countries. Such funds are now being realized. Nonetheless, this paper is possibly the first theory-based discussion of international technology funding. It sets up an intuitive Ramsey model of a developing economy including imports of capital and embodied technologies from abroad. Going beyond a scale, technique and composition effect, it disentangles five relevant effects and four technology-related policy levers and their interactions. It then discusses their role in designing an international technology fund with the aim to reduce emissions efficiently. The paper concludes that it is inefficient to address emissions reductions independent of the technological absorptive capacity and other aspects of economic development. Therefore, it opts for an integrated technology funding scheme. [ABSTRACT FROM AUTHOR]

This paper analyzes the drivers of carbon taxes acceptability with survey data and a randomized labeling treatment. Based on a sample of more than 300 individuals, it assesses the effect on acceptability of specific policy designs and individuals' perceptions of carbon taxes advantages and disadvantages. We find that the lack of perception of primary and ancillary benefits is one of the main barriers to the acceptability of carbon taxes. In addition, policy design matters for acceptability and in particular earmarking fiscal revenues for environmental purposes can lead to larger support. We also find an effect of labeling, comparing the wording 'climate contribution' with 'carbon tax'. We argue that proper policy design coupled with effective communication on the effects of carbon taxes may lead to a substantial improvement in acceptability. [ABSTRACT FROM AUTHOR]

Globalization is accompanied by increasing current account imbalances. They can undermine the positive impacts of increasing international cooperation and trade on economic growth and income convergence. At the same time, climate change challenges the global community and requests for co-operative action. Regional energy transformation due to climate policies and the resulting regional mitigation costs are key variables of climate economic analysis. This study is the first that include current account imbalances and imperfect capital markets to investigate potential market feedback mechanisms between climate policies, energy sector transformation and capital markets. Furthermore, it answers the question whether the capital-intensive transformation towards zero-carbon economies increases the policy cost of mitigation under the condition of imperfect capital markets. First results demonstrate a dominant baseline effect of capital market imperfections on macroeconomic variables, and moderate effects on mitigation costs in global climate policy scenarios. For some regions (e.g. Middle East) estimates of relatively high mitigation costs are revised downwards, if imperfect capital markets are considered. [ABSTRACT FROM AUTHOR]

Subsidies to electricity generation from renewable energy sources (RES-E) implemented next to an emissions trading scheme (ETS) are frequently criticised for producing no additional benefit in terms of mitigating climate change and increasing the costs of emissions abatement. We re-assess the performance of this policy mix in a setting in which electricity generation produces multiple externalities (beyond climate change) and in which these externalities cannot be addressed by first-best policies. Using an analytical partial equilibrium model, we show that the optimal composition of the policy mix depends on the market interactions between the multiple externalities. We complement this analysis by a quantitative policy assessment, combining a top-down, global macro-economic model and a bottom-up, global electricity sector model. The quantitative analysis suggests that RES-E subsidies may be effective in partly reducing externalities from fossil fuel combustion (by crowding out gas- and oil-fired generation) and in mitigating radiation hazards (by crowding out nuclear generation). However, RES-E subsidies are not necessarily suited to address externalities related to the extraction and transportation of fossil fuels or risks of sudden supply interruptions for imported fuels. With respect to these latter externalities, tightening the ETS cap may be a more effective, but politically less feasible approach. [ABSTRACT FROM AUTHOR]

A simple model is used to illustrate the effects of a reduction in (marginal) abatement cost in a two-country setting. It can be shown that a country experiencing a cost reduction can actually be worse off. This holds true for a variety of quantity and price-based emission policies. Under price-based policies, a country with lower abatement costs might engage in additional abatement effort for which it is not compensated. Under a quantity-based policy with a given allocation, a seller of permits can also be negatively affected by a lower carbon price. We also argue that abatement cost shocks to renewable energy and carbon capture and storage (CCS) are different in terms of their effects on international energy markets. A shock to renewable energy benefits energy importers because the value of fossil fuels is reduced. The opposite holds for a shock to CCS which benefits energy exporters. The channels identified in the theoretical model can be confirmed in a more complex global computable general equilibrium model. Some regions are indeed worse off from a shock that lowers their abatement costs. [ABSTRACT FROM AUTHOR]