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

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Theme 1
Dear Minister of the Environment,
As you prepare to make a presentation to the cabinet on the possibility of implementing an incentive-based mechanism (IBM) to control greenhouse gas emissions (GHGs), I wanted to provide you with some information regarding the potential impact of IBM on domestic companies.
The cost burden concern of implementing an incentive-based mechanism (IBM) to control greenhouse gas (GHG) emissions is particularly relevant when it comes to the international competitiveness of local firms. When Indecisivia introduces an IBM to control GHG emissions, domestic firms that are subject to the mechanism will face additional costs compared to firms in other countries that are not subject to similar policies. This can put domestic firms at a disadvantage in terms of competitiveness, as they may find it more difficult to compete with foreign firms that can produce goods at lower costs. The degree of cost burden that domestic firms face will depend on several factors, including the design of IBM, the level of competition in the relevant industry, and the extent to which other countries implement similar policies.
The cost burden concern of implementing an incentive-based mechanism (IBM) to control greenhouse gas (GHG) emissions is closely related to the concept of carbon leakage. Carbon leakage occurs when emissions reductions achieved in one country are offset by increased emissions in another country that does not have similar GHG policies. This can happen when companies in one country face a cost burden due to the implementation of an IBM, which may lead to higher prices for their goods and services. As a result, consumers may turn to cheaper imports from other countries that do not have similar GHG policies, leading to an increase in emissions in those countries. In the case of Indecisivia, there are four reasons why IBM would lead to carbon leakage.
First, IBM would lead to increased production costs. If IBM imposes significant costs on domestic companies to reduce their emissions, it could make them less competitive compared to foreign companies in countries without similar policies. As a result, some domestic companies may choose to relocate their production to countries with lower emission control costs, leading to an increase in carbon emissions in those countries. In such a way some domestic companies may end up outsourcing their carbon emission to other countries. Second, if IBM leads to higher prices for domestically produced goods, consumers may choose to substitute those goods with cheaper imported goods. This substitution effect can lead to a reduction in domestic production and consumption of goods, and an increase in imports from countries with lower emission control costs, resulting in carbon leakage.
Third, it is essential to consider that the implementation of IBM may require the government to put in place measures that may result in a competitive disadvantage for foreign companies. In such cases, a foreign government may argue that IBM places an unfair burden on their companies, making it difficult for them to compete with Indecisivia's products in their domestic markets. As...