Impact of Incentive-Based Mechanism (IBM) on Domestic Companies

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Theme 1
Dear Minister of the Environment,
As you present to the cabinet the possibility of implementing an incentive-based mechanism (IBM) to control greenhouse gas emissions (GHGs), I would like to provide you with some information regarding the impact of IBM on domestic companies.
The cost burden associated with implementing an IBM for controlling GHG emissions is relevant in the context of the international competitiveness of domestic firms. Introducing an IBM in Indecisivia can result in additional costs for domestic firms subject to the mechanism, potentially putting them at a competitive disadvantage relative to firms in other countries that are not subject to similar policies. The magnitude of this cost burden is contingent on several factors, including the IBM design, the degree of competition within the relevant industry, and the extent to which other countries adopt comparable policies. As such, a comprehensive understanding of these factors is critical in evaluating IBM’s latent impact on the firm’s domestic competitiveness.
The potential for carbon leakage to occur due to implementing an incentive-based mechanism (IBM) to control greenhouse gas (GHG) emissions is a salient concern, as it has significant implications for the cost burden associated with such a policy. Carbon leakage is a phenomenon in which emission reductions achieved in one country are offset by increased emissions in another without similar GHG policies. This can occur when firms in the former region face increased costs due to implementing an IBM, which may result in higher prices for their goods and services. Consequently, consumers may shift their demand to cheaper imports from countries without comparable GHG policies, leading to increased emissions in those countries. In the context of Indecisivia, four key factors contribute to the likelihood of carbon leakage occurring due to implementing an IBM.
Firstly, implementing IBM (International Border Measures) could increase domestic companies' production costs. If IBM mandates substantial costs for domestic companies to decrease their emissions, it could impede their competitiveness relative to foreign companies operating in countries without comparable policies. Accordingly, some domestic companies may opt to relocate their production facilities to countries with more lenient emission control costs, resulting in a rise in carbon emissions in those countries. This phenomenon could lead to the outsourcing of carbon emissions by some domestic companies to other countries. Secondly, if IBM increases the prices of domestically produced goods, consumers may opt to substitute those goods with more affordable imported alternatives. This substitution effect could lead to a decline in domestic production and consumption of goods, and an increase in imports from countries with lower emission control costs, ultimately resulting in carbon leakage.
Thirdly, it is imperative to acknowledge that the implementation of IBM may necessitate the enactment of measures by the government that could potentially result in a competitive disadvantage for foreign companies. In such instances, a forei...