Tackling Carbon Leakage 2009

Professor Michael Grubb, Climate Strategies

If damaging externalities are not internalised in prices, there is no basis to assume that economic liberalisation and free trade will ultimately improve human welfare. This dilemma is considered in respect to carbon leakage, by examining: emissions trading in the EU and US; competitiveness exposure and leakage; the basic options and their economic characteristics; distortions arising from free allocations; and border adjustment dangers and challenges. It is suggested that there are different options for addressing carbon leakage, but few are easy. Those approaches that differentiate by sector and time will open options, increase effectiveness and reduce risks. However, such approaches need to make an assessment of ‘sectors at risk’ when making allocation approaches. A range of sector-specific recommendations are put forward, covering steel, cement and aluminium.