Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating Greenhouse Gas Emissions
Companies facing international competition may experience risks of negative economic and environmental outcomes under national carbon pricing policies. How can lawmakers account for these risks in assessing options to address such competitiveness impacts?
Domestic carbon pricing policies may impose adverse competitiveness risks on energy-intensive firms and industries competing with foreign firms that may bear a lower or zero price on carbon. The risks of competitiveness effects include adverse economic outcomes—reduced production, lower employment, and higher net imports—and adverse environmental outcomes, with the shifting of emissions-intensive activities to unregulated foreign markets. Each can undermine political support for carbon pricing. Competitiveness policies, such as border tax adjustments, output-based tax credits, and related policies, also carry potential risks. They may result in less favorable distributional outcomes, undermine cost-effectiveness and economic efficiency, and raise risks in international trade and multilateral climate negotiations. This paper reviews the theoretical and empirical research on competitiveness risks, as well as the risks posed by competitiveness policies, and presents two alternative frameworks through which policymakers can weigh these various risks when evaluating policy options for addressing potential competitiveness effects as a part of a domestic carbon pricing regime.
- The risks of competitiveness effects include adverse economic outcomes—reduced production, lower employment, and higher net imports—and adverse environmental outcomes, with the shifting of emissions-intensive activities to unregulated foreign markets.
- Policies to mitigate competitiveness impacts may also carry important distributional, economic efficiency, and diplomatic risks.
- Existing empirical estimates of competitiveness impacts suggest that pricing carbon would impose small economic and environmental costs for most industries and the economy as a whole.
- Policymakers could employ a framework to compare the benefits and costs of various options for competitiveness policies and identify the alternative that maximizes net social benefits.
- Rigorous assessments of the benefits and costs of policies to address competitiveness risks could also inform a political economy framework focused on securing sufficient political support for a carbon pricing policy.
Common Resources — Feb 22, 2024
Modeling Deep Decarbonization in the Industrial Sector: Opportunities and Challenges for Modelers and Policymakers
Decarbonizing the industrial sector is a growing priority. To help produce models with high-quality data that inform policy, transparency and dialogue should be fostered among modeling colleagues, policymakers, and the modeling community.
Report — Dec 6, 2023
Comparing the European Union Carbon Border Adjustment Mechanism, the Clean Competition Act, and the Foreign Pollution Fee Act
This report compares goals and designs of three border adjustment mechanisms: the European Union's Carbon Border Adjustment Mechanism, the Clean Competition Act, and the Foreign Pollution Fee Act.
Press Release — Dec 6, 2023
New Report Compares Recent International Climate and Trade Policies
With the 28th Conference of the Parties (COP28) putting a spotlight on international climate policy, a new RFF report compares three climate and trade policies and analyzes each one’s unique goals, structures, and international repercussions.
Common Resources — Nov 30, 2023
Examining the Compatibility of Carbon Markets with Carbon Dioxide Removal
The combination of carbon markets and carbon dioxide removal technologies that are financed by governments could exacerbate economic inequality. Proactive policymaking can help mitigate this risk.