Allocation rules for carbon permits

Unilateral carbon pricing tends to induce carbon leakage to other countries. Hence, output-based allocation (OBA) of quotas to leakage exposed firms has been implemented e.g. in the EU ETS. We consider the effects of combining carbon pricing and OBA with a consumption tax that corresponds to the implicit subsidy rate of OBA. In the first paper we use a combination of analytical methods and a stylized numerical model of the global economy. We also compare this policy with border tax adjustments (carbon tariffs + export rebates). We find that adding such a consumption tax is likely to be welfare-improving.