Leakage from climate policies and border tax adjustment:
lessons from a geographic model of the cement industry
Résumé
We present a spatial international trade model, GEO, which computes transportation costs by
not treating markets as dimensionless points and explicitly represents capacity shortages and
investment decisions in new production capacities. We link it to CEMSIM, a partial
equilibrium model of the world cement industry developed by the IPTS. We assume that the
Kyoto Protocol Annex B countries (except the USA and Australia), create a CO2 tax at 15
euros per tonne. This policy entails significant emissions reductions (around 20%) in these
countries. A significant leakage occurs, with an emissions increase in the rest of the world of
around 20% of the emissions reduction in Annex B-USA&Australia. We thus run two
scenarios combining a CO2 tax with border-tax adjustments (BTA). With the more ambitious
BTA tested, not only is there no leakage, but emissions in the rest of the world decrease
slightly. However, compared to business-as-usual, non-Annex B price-competitiveness and
production decrease a little and these countries loose some market shares, so they could
attack this system as distorting competition in favour of Annex B countries. A less ambitious
BTA is thus tested, which cannot be criticised on this ground and prevents almost all leakage.
The only drawback of both BTA policies is that the cement price in Annex BUSA&
Australia increases a little more than without BTA, further impacting the cement
consumers in these countries.
not treating markets as dimensionless points and explicitly represents capacity shortages and
investment decisions in new production capacities. We link it to CEMSIM, a partial
equilibrium model of the world cement industry developed by the IPTS. We assume that the
Kyoto Protocol Annex B countries (except the USA and Australia), create a CO2 tax at 15
euros per tonne. This policy entails significant emissions reductions (around 20%) in these
countries. A significant leakage occurs, with an emissions increase in the rest of the world of
around 20% of the emissions reduction in Annex B-USA&Australia. We thus run two
scenarios combining a CO2 tax with border-tax adjustments (BTA). With the more ambitious
BTA tested, not only is there no leakage, but emissions in the rest of the world decrease
slightly. However, compared to business-as-usual, non-Annex B price-competitiveness and
production decrease a little and these countries loose some market shares, so they could
attack this system as distorting competition in favour of Annex B countries. A less ambitious
BTA is thus tested, which cannot be criticised on this ground and prevents almost all leakage.
The only drawback of both BTA policies is that the cement price in Annex BUSA&
Australia increases a little more than without BTA, further impacting the cement
consumers in these countries.
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