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International Monetary Fund. Western Hemisphere Dept.

for reducing emissions intensity but with a smaller burden on the industries than from higher carbon pricing (Annex 3). Under a feebate firms would pay a fee given by: CO2 price × {CO 2 /production ─ industry-wide average CO 2 /production} × production Feebates are essentially the fiscal analog of OBPSs, but they avoid the need for trading markets and provide more certainty over emissions prices—prices would be easily harmonized with carbon prices applied to fossil fuels to promote cost effectiveness across the EITE sector and the rest of the economy. Annex 3

International Monetary Fund. Asia and Pacific Dept

Conceptual Analysis 1. The burden—or increase in private production costs—for industries from carbon mitigation policies is depicted graphically in Figure A1 . Here the upper, middle, and lower curves are respectively the marginal cost of reducing emissions through reducing domestic industry output, reducing the emissions intensity of output and the envelope of these two curves. A carbon pricing policy reduces emissions by ∆E tot , with ∆E int and ∆E out coming from reduced emissions intensity and reduced output respectively. The burden of carbon

International Monetary Fund. Asia and Pacific Dept

reduced the international competitiveness of Korean farmers. A feebate approach is worth studying, perhaps based on GHG equivalent emission rates per hectare or nutritional value. Another approach would be to combine an emissions fee with the revenues recycled to the agricultural sector in the form a rebate proportional to the value of farm output. This scheme would cost-effectively promote all behavioral responses for reducing the emissions intensity of farming and, from an administrative perspective, the fees and rebates could be integrated into collection procedures

Mr. Nicolas Arregui, Ian W.H. Parry, and Ms. Dora M Iakova

, they can play a reinforcing role when carbon pricing is subject to acceptability constraints. Third, they may be needed to meet sectoral targets that are more ambitious than nationwide targets. Feebates are a promising reinforcing instrument . Feebates provide a (revenue-neutral) sliding scale of fees on products or activities with above average emission rates and a sliding scale of rebates for products or activities with below average emission rates. They can provide strong incentives to reduce emissions intensity without (unlike fuel taxes or carbon pricing) a

International Monetary Fund. Asia and Pacific Dept

at the sectoral level with feebates to enhance mitigation incentives in the transport, power, industrial, and building sectors (some elements of a feebate already apply in transportation). Feebates apply a revenue-neutral, sliding scale of fees on products or activities with above average emission rates and a sliding scale of rebates on products or activities with below average emission rates. Feebates: (i) can cost-effectively promote the full range of responses for reducing emissions intensity within a sector; (ii) avoid a fiscal cost to the government; (iii