Rebating Revenues from Unilateral Emissions Pricing

We evaluate alternative options for rebating revenues from a unilateral emissions price, focusing on emissions-intensive and trade-exposed industries. First, we develop a two-region and two-sector general equilibrium model and use it to demonstrate that rebating emission pricing revenues towards output increases and emission intensity reductions may be welfare-improving. These rebates are beneficial when emissions leakage and terms-of-trade changes are associated with the introduction of an emissions price, or when political constraints prevent the emissions price from fully reflecting the social cost of the emissions. We use a multi-region and multi-sector numerical simulation model to quantify the differences in welfare, leakage, terms of trade, output, and emissions across carbon prices with alternative rebating options for emissions-intensive and trade-exposed industries. The quantitative results indicate that from a domestic perspective, rebating emissions revenues proportionately to firm output is typically superior to other rebating options when the emissions price is set close to the social cost of emissions. Rebating emissions pricing revenues to reward reductions in emissions intensity is typically superior when emissions are significantly under-priced. A country that is more emissions-intensive and less exposed to leakage may prefer to rebate in proportion to total abatement when the emissions price is sufficiently low. The analysis highlights that incorrect choices of the rebating option can lead to substantial welfare losses.