Change in real income from the Baseline for the 450 Delayed Action and 550 Core scenarios, 2050

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Actions needed for an ambitious, global climate policy framework The first and best solution to address the competitiveness concerns described above would be a global, comprehensive and ambitious climate policy framework that creates a level playing field, covering all sectors and all GHGs (Agrawala et al., 2010a). Broadening the scope of mitigation action also reduces the related problem of carbon leakage – when mitigation policy in one country leads to increased emissions in other countries, thereby eroding the environmental effectiveness of the policy. Leakage can occur through a shift in economic activity towards unregulated countries, or through increased fossil energy use in unregulated countries as a result of lower international fuel prices in response to the reduced energy demand in mitigating countries. As long as countries take such varied approaches to carbon markets, concerns about leakage and international competitiveness will remain a significant stumbling block to ambitious climate change action in many OECD countries (Box 3.12). In evaluating the potential competitiveness impacts, governments may be most concerned about emission leakage and conserving output and employment, whereas energyintensive industries are more likely to be concerned about profits and market share. In fact, competitiveness impacts of climate policies are likely to be limited to a small number of sectors representing a small share of total economic activity, i.e. trade-exposed, energy-intensive industries (including include chemicals, non-ferrous metals, fabricated metal products, iron and steel, pulp and paper, and non-metallic mineral products). The patchwork of climate policies across the globe today entails higher compliance costs in some countries than others, and raises concerns in some countries about the competitiveness of their energyand/ or carbon-intensive industries at the international level. These in turn often delay action or discourage more ambitious action. The cheapest policy response to climate change would be to set a global carbon price – this would require linking the various ETSs that are emerging locally. Linking generally allows polluters to purchase credits from a larger set of suppliers. Access to cheaper mitigation options lowers costs by reducing domestic efforts for permit buyers; polluters with relatively cheap mitigation options can gain from increasing domestic reduction efforts and selling these on the international market.


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