Emissions and Industrial Competitiveness Implications of Alternative Carbon Policy Approaches

Abstract: Market-based policies for emissions reduction, including emissions trading systems, have been adopted or considered by many regions. How to cover emissions from energy-intensive trade-exposed (EITE) sectors under these or other systems has long been debated due to the potential negative impacts on industrial competitiveness and emissions leakage. A common perception is that pursuing climate objectives would harm EITE industries, while trade or industrial policies would serve purposes unrelated to emissions reduction. However, in regions and sectors in which production is cleaner, on average, than production of major trading partners, it may be possible to combine climate and trade measures to support both emissions reduction and industrial competitiveness, while also limiting price impacts. 

We explore this question by comparing different emissions reduction policy instruments for U.S. steelmaking that include both domestic and border policy components. We also vary coverage assumptions for the same instrument, comparing a coupled policy to either a domestic or border policy alone. 

We find that several versions of a domestic-plus-border policy reduce emissions while increasing domestic production, whereas domestic or border policies alone support one policy objective at the expense of the other. Our results contribute to a growing body of literature on how climate and trade policies and outcomes may interact.