Working Paper Series,
Norwegian University of Life Sciences, School of Economics and Business

Abstract: Unilateral actions to reduce CO2 emissions can be costly and may lead to carbon leakage through relocation of emission-intensive and trade-exposed industries (EITE). This paper examines the welfare effects of introducing an emission offset mechanism for the EITE sector, where EITE producers may have to acquire more than one offset credit to balance one ETS allowance. The analytical results suggest that under certain conditions it is globally welfare improving for a single region to introduce such an offset mechanism. Numerical simulations in the context of the EU ETS and REDD+ credits support the analytical findings, and suggest that it is optimal for the EU to require EITE producers to acquire several REDD+ credits to offset one EU ETS allowance.

Keywords: Carbon leakage; emission trading system; unilateral policy; REDD+

JEL-codes: D61; F18; H23; Q54

37 pages, August 5, 2019

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