Governing EU-Norwegian willingness to extract, combust and consume less carbon

Global CO2 emissions are a major threat to the global climate. In the absence of market imperfections the first-best policies to mitigate carbon emissions would implement a harmonized carbon price uniformly in all sectors and regions. For a variety of reasons, this is unlikely to be achieved in the short to medium term. The objective of this project is to identify how to best coordinate policies in the EU and Norway to maximise the overall effectiveness of their combined initiatives. A key challenge for unilateral policy initiatives in a global market place are carbon leakage and competitiveness concerns. To reduce such effects countries/regions can target leakage policies towards different points of the fossil fuel and emissions supply chain. In WP1 we have found that firm-targeted tariffs can deliver considerably stronger leakage reduction and higher gains in global cost-effectiveness than tariff designs operated at the industry level. Including indirect emissions from electricity production hamper carbon leakage even more. Moreover, because the exporters outside the coalition are able to reduce their carbon tariffs by adjusting emissions, their competitiveness and the overall welfare of their economies will be less adversely affected than in the case of industry-level carbon tariff regimes, Böhringer et al. (2017a). The project has updated the emissions and economic data in the GTAP database for 2015 and have analysed the cause of changes in European territorial and consumption emissions, and quantified the role of different sectors and regions over the period 1990-2015. The decline in European emissions is largely driven by slower economic growth since the global financial crisis, and the growth in imported emissions has tempered due to structural changes in China (Karstensen et al 2018). In WP2 we have analysed how a climate coalition?s future policies regarding own fossil fuel production (supply-side policies) affect the present emissions from outside of the coalition (free-riders), Hagem and Storrøsten (2017). We find that announcing future unilateral supply-side policies reduces early foreign emissions and derive the optimal combination of consumer taxes and producer taxes. We show that the tax shares generally differ over time, and that a declining present value of the social cost of carbon over time supports a time path where the consumer tax?s share of the total carbon tax also declines. We also find that when the investment costs are convex, announcement of future emission taxes will reduce current emissions (Storrøsten, 2018). The results do not support the hypothesis that taxes should be gradually phased in to avoid excess adjustment costs. On the contrary, lower emissions in the future require action today, and the lion share of abatement effort occurs early along the socially optimal time trajectory. This implies that the Pigou tax must be coupled with investment taxes (or decommissioning subsidies) on emission intensive production capacity and subsidies to clean capacity. In WP3 we have analysed combinations of consumption-targeting and supply-targeting policies. We show that the combination of output-based rebating (as in EU-ETS) and a consumption tax for emission-intensive and trade-exposed goods can be equivalent with border carbon adjustment. In a numerical illustration for EU policies we find that it is welfare improving for a coalition that implement emission pricing along with output-based rebating to introduce such a consumption tax (Böhringer et al., 2017b). We have also analysed the impacts for a small, open country (Norway) with carbon abatement ambitions of joining a coalition (EU) with allowance trading. We find that using flexible mechanisms also for emissions outside today?s allowance trading system, reduces costs for Norway and benefits the coalition at large, Böhringer et al., 2017d. The data prepared in WP1 was used to analyze the impact of prices assuming a change in accounting from extraction, production, and consumption (Karstensen and Peters, 2017). In the Paris Agreement, the emission caps of many countries are so vaguely formulated or so high that there is still scope for climate effects of cutting petroleum production. Fæhn et al (2018a,b) addresses the choice of supply-side policy instruments in the wake of Paris and give economic and strategic arguments for both quantity and price regulations following the new conditions. We have also analysed the propagation of carbon prices along the global supply-chain when the carbon price is applied at either the point of fossil-fuel extraction, emissions, or the consumption of goods and services. Consumers generally bear the largest burden due to the propagation of prices through the supply chain, while fossil-fuel suppliers (countries) have an opportunity to reap large revenues if they apply carbon prices at the point of extraction (Karstensen and Peters, 2018).

While waiting for the global, uniform carbon price, Norway and EU have implemented unilateral carbon policies that may lead to carbon leakage and loss in competitiveness. The vast majority of current climate policies apply the carbon price at the point of combustion, i.e. where CO2 enters the atmosphere (combustion-targeting). Two other discussed waypoints to place carbon pricing are the point at which goods and services are consumed (consumption-targeting), or at the point where at which carbon is extrac ted from the ground (extraction-targeting). In three work-packages we will analyse the last two waypoints and their efficiency in terms of global emission effects and economic welfare. WP1: In this WP we will analyse two numerical approaches to BCA not ye t explored. First, we will calculate a theory-consistent system of endogenous tariff rates that perfectly target the carbon content of imports, and then compare this ideal system with different practically and feasible less ideal systems, by using a globa l CGE model. In the other approach we will update a detailed bottom-up model of the global economy and quantify the sectors and regions with the biggest changes in embodied carbon flows into Europe. WP2: In this WP we will look into different aspects of e xtraction-targeted policies. We will especially focus on theoretical and numerical analyses of a possible "green paradox". We will theoretically explore the possibility of totally eroded climate effects due to shifting extraction in time. We will also see k to identfy the theoretical effects in numerical simulations with dynamic global fossil fuel market models, when analysing possible extraction-targeted policies in the EU-Norway coalition. WP3: In this WP we will combine the experiences from extraction- targeted pricing in WP2 with those of WP1's consumption targeting focus by using both a global CGE-model approach and a bottom-up model approach