Consumption - vs . Production - Based Emission Policies

13 Emission leakage could potentially undermine the effectiveness of unilateral 14 climate policies. Significant emission transfers from developing to developed 15 countries in the form of emissions embodied in trade have been interpreted as an 16 indication of such leakage. In order to reduce leakage and provide an appropriate 17 picture of countries’ responsibility for global emissions, it has been proposed to 18 attribute emissions on the basis of consumption instead of production. However, 19 as one unit of imported emissions cannot generally be equated with a 20 corresponding increase of emissions released to the atmosphere, putting a price 21 on an externality equal to its social costs (e.g. by means of consumption-based 22 emission pricing) is not optimal for emissions embodied in imports. Hence, we 23 mandate considering a broad scope of trade measures to reduce leakage, in 24 particular focusing on a few highly traded emission-intensive industries and 25 exploiting the potential of export taxes to alleviate distributional concerns and 26 political resistance. Finally, we argue that the optimal policy portfolio to address 27 leakage may contain not only trade measures but also some form free allocation 28 of emission permits as well as sectoral approaches. 29 30 Acknowledgements: We are grateful to Sabine Fuss and Philippe Quirion for 31 helpful comments and suggestions and to Silvia Forin and Hauke Schult for 32 assistance with consumption-based emission data. 33