[Doc] Carbon Leakage, Free Allocation and CBAM: Cost-Competitiveness and Green Technology Investment
Le 9 janv. 2025
Abstract
"This paper develops a partial equilibrium model to examine strategic interactions of domestic and foreign firms under the European Union Emissions Trading System (EU ETS), focusing on anti-carbon leakage policies, namely free allocation and the Carbon Border Adjustment Mechanism (CBAM). Our model highlights the impact of these policies on firm competitiveness, green technology investment, carbon leakage reduction, and overall emissions. The analysis reveals that while CBAM effectively restores competitiveness, incentivizes green technology adoption, and mitigates carbon leakage, free allocation yields mixed results, with potential to increase global emissions depending on foreign emission intensity thresholds. Furthermore, we introduce a threshold for foreign emission rates, where free allocation shifts from an environmental measure to a protectionist tool and leads to an increase in global emissions. Numerical simulations confirm these strategic outcomes, showing nuanced interdependencies between policy design, investment incentives, and leakage rates. Our findings underscore the importance of coordinated policies like CBAM and highlight the need for careful design to effectively balance economic and environmental objectives."
