The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
A common policy measure against leakage is output-based allocation of emissions allowances, whose effectiveness could be further enhanced by consumption taxes levied on the carbon intensity of goods. We combine theoretical and numerical analysis to derive optimal combinations of output-based allocation and consumption taxes for different assumptions on the stringency of emissions reduction targets, the coverage of emissions in regulated sectors, and their trade exposure. A key analytical finding is that output-based allocation and consumption taxes are complements rather than substitutes, i.e., the extent of output-based allocation should be higher if combined with a consumption tax. A key numerical finding is that the optimal output-based allocation and consumption tax rates should be set at almost the same rate and increase substantially with the stringency of the emissions reduction targets.