Leakage from climate policies and border tax adjustment:<br />lessons from a geographic model of the cement industry

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