CAN SECTORAL AGREEMENTS AND OUTPUT BASED ALLOCATION ADDRESS LEAKAGE?

The document evaluates two mechanisms to prevent emissions leakage: output-based allocation and sectoral agreements. It concludes that output-based allocation can reduce leakage if applied to the first tradable intermediary product, but it often undermines incentives for innovation and product substitution. Sectoral agreements are deemed more promising if led by governments rather than voluntary private action, potentially utilizing financial incentives and border adjustments to ensure a level playing field and long-term CO2 price internalization.

• Output-based allocation effectively reduces emissions leakage only when it is applied directly to the first tradable intermediary product following the CO2-intensive process, such as raw aluminium, clinker, or semi-finished steel.
• Applying output-based allocation to later production stages maintains the risk of leakage because companies may import CO2-intensive intermediary products while still receiving free allowances.
• Output-based allocation diminishes incentives for low-carbon innovation in three ways: it restricts product improvement due to rigid administrative definitions of qualifying products, removes incentives to reduce the use of CO2-intensive intermediaries in later steps, and eliminates the price signal that drives the development of lower-carbon substitutes.
• Voluntary, private sector-led sectoral agreements are unlikely to address leakage because they cannot convince competitors to share the disadvantage of price internalization and lack the regulatory pressure necessary to ensure stringent standards.
• Government-led sectoral agreements are more capable of addressing leakage by ensuring all firms in participating countries are covered, though they may still face challenges from new investments in non-participating neighboring countries.
• To encourage countries to join government-led sectoral agreements and mitigate industry opposition, policies such as financial transfers and border adjustments for specific products (e.g., semi-finished steel) can be used to create a level playing field.

APA

COLOMBIER, M., & NEUHOFF, K. (2007). CAN SECTORAL AGREEMENTS AND OUTPUT BASED ALLOCATION ADDRESS LEAKAGE? Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/cs-paris-eu-ets-070706.pdf

Chicago

COLOMBIER, MICHEL, and KARSTEN NEUHOFF. CAN SECTORAL AGREEMENTS AND OUTPUT BASED ALLOCATION ADDRESS LEAKAGE? Climate Strategies, 2007. https://climatestrategies.org/wp-content/uploads/2014/11/cs-paris-eu-ets-070706.pdf.

Wikipedia

{{cite report |last1=COLOMBIER |first1=MICHEL |last2=NEUHOFF |first2=KARSTEN |title=CAN SECTORAL AGREEMENTS AND OUTPUT BASED ALLOCATION ADDRESS LEAKAGE? |publisher=Climate Strategies |date=6 July 2007 |url=https://climatestrategies.org/wp-content/uploads/2014/11/cs-paris-eu-ets-070706.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{colombier2007can, author = {COLOMBIER, MICHEL and NEUHOFF, KARSTEN}, title = {{CAN SECTORAL AGREEMENTS AND OUTPUT BASED ALLOCATION ADDRESS LEAKAGE?}}, institution = {Climate Strategies}, year = {2007}, month = jul, url = {https://climatestrategies.org/wp-content/uploads/2014/11/cs-paris-eu-ets-070706.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }