What is carbon leakage?
- the increase in GHG emissions in rest of world divided by decrease of emissions in country due to GHG policy
How does Carbon Leakage relate to imports/exports of a country?
- country emits less emissions due to policy -> produces less because of higher costs
- demand has to be fulfilled -> imports more than before, emissions embedded in increase of imports is amount of carbon leakage
- exports get smaller
- climate policy, trade barrier, type of goods, how hard it is to relocate production influence true leakage
Why is it difficult to identify carbon leakage in practice?
- no information about emissions without policy
- amount of true leakage unclear, hard time seperating carbon leakage from other developments leading to changes in trade and production patterns
What two methods to counter carbon leakage do we know and how do they work?
- Border Carbon Adjustments
- country’s customs measure amount of carbon embedded in imported goods
- charge importer for this amount the same price that domestic producers pay through GHG policy
- problem: not allowed under WTO rules
- Compensations
- cap and trade: free allocation for companies with risk of leakage
- environmental taxation: exemptions or lower rates for companies at risk
- renewable energy: exemptions from surcharges for companies at risk
What is so problematic about carbon leakage & policies in real life?
- debate counterfacutal as hard to measure
- policy makers very sensitive (risking jobs for green policy)
- complete elimination of leakage unrealisitc (international agreement or border adjustments)
- companies that successfully claim to be at risk will likely receive compensation
What are depletable resources?
- are exhausted when last unit is consumed
- opposite of inexhaustible resources
- problem: depletable resources can become to expensive before being exhausted, hard to distinguish from inexhaustible resources
What is a model to estimate the efficient amount of extraction of a non-renewable resource and what are its problems?
- hotelling model
- problems:
- net prices usually not available because extraction costs unobservable -> market prices used
- several strong assumptions may cause firms behavior not to be efficient: extraction costs, resource stocks, discount rates not constant, no externalities, political considerations, no perfect foresight
What is the result of the hotelling rule to determine the efficient amount of extraction of a non renewable resource?
- see image
- Pt = a - b Rt is the demand function of a period in regard to the amount of extraction R
- p is the discount rate
- c is the marginal extraction cost of a period, in general constant
- restriction Stock S which will completely be extracted
What happens to the resource rent (price - extraction cost) with growing discount rate p?
it grows
What is the green paradox?
- usually policy introductions to limit use of bad resources are announced far in advance
- > this might lead to more extraction until then, making the policy absurd
Using the hotelling model, what happens if government places a per unit tax on selling coal in t=1?
- with tax producers receive less rent for their resource after introduction of policy
- resource owner’s rent today has to adjust for guaranteeing optimal extraction
- P0 needs to decrease, therefore extraction today increases
Using the hotelling rule, what happens if government plaxes a tax on using coal in t=1?
- with tax on consumption, demand reduces
- resource owner’s rent today has to adjust to guarantee optimal extraction
- therefore extraction increases
Using the hotelling rule, what happens if the government restricts extraction in t = 1?
- Extraction in t = 1 reduces
- resource owner’s rent today has to adjust to guarantee inter-temporal optimality
- Extraction in t = 0 needs to decrease and therefore price today increases
- > quantitiy restriction could work better than usage or selling taxes/restrictions
What is intertemporal carbon leakage?
shift in extraction and therefore emissions from future to present -> green paradox
What is a strong green paradox?
When shifting emissions to present (intertemporal carbon leakage) increases cumulative emissions.
How can clean energy help avoiding the green paradox?
- green paradox occurs in a world with no clean energy alternative
- with affordable clean alternative, fuel consumers will switch at certain price -> it becomes uneconomical to mine the resource, emissions stay in ground
- > mix of sustainability policy and support for green R&D is promising
How can the green paradox influence spatial leakakge?
- Intertemporal leakage can reinforce spatial leakage through a price effect
- price effect: price of resource decreases due to policy in other country, this causes rise in emissions in country without carbon tax
