Consumption- Versus Production-Based Emission Policies

Abstract

Emission leakage could potentially undermine the effectiveness of unilateral climate policies. Significant emission transfers from developing countries to developed countries in the form of emissions embodied in trade have been interpreted as an indication of such leakage. To reduce leakage and provide an appropriate picture of countries’ responsibility for global emissions, an alternative proposal is to attribute emissions on the basis of consumption instead of production. However, as one unit of imported emissions generally cannot be equated with a corresponding increase in emissions released to the atmosphere, putting a price on emissions embodied in imports equal to the social cost of these emissions (e.g., by means of consumption-based emission pricing) is not an optimal policy. Hence, one should consider a broad scope of trade measures to reduce leakage, focusing on a few highly traded, emission-intensive industries. Finally, the optimal policy portfolio to address leakage may also contain free allocation of emission permits and sectoral approaches.