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Carbon control policies, competitiveness, and border tax adjustments

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  • Dissou, Yazid
  • Eyland, Terry

Abstract

Several propositions have recently been made to use border tax adjustments (BTAs) to address the loss of competitiveness induced by unilateral stringent domestic pollution control policies. This paper explores in a general equilibrium framework the sectoral and welfare implications of a unilateral domestic GHG control policy combined with a BTA scheme. Using the Canadian economy as an illustration, we assess the extent to which BTAs achieve their objectives and analyze the impacts of different methods of recycling the BTA proceeds to support domestic industries. Our simulation results suggest that imposing BTAs on the imports of non-fossil and energy-intensive products reduces or removes completely the negative competitiveness impacts that domestic industries suffer from. The use of the proceeds of the BTAs to support domestic energy-intensive industries improves their competitiveness and, more importantly, in some cases, overprotects them, as it allows them to even increase their output in comparison to the benchmark without emissions control. Our results also shed light on the existence of heterogeneity in the composition of energy-intensive industries as far as the recycling method of the BTA proceeds is concerned. Energy-intensive industries that are more oriented toward the domestic market are better off with the recycling of the BTA proceeds towards gross output than towards exports alone. Finally, abstracting from the environmental benefits of reduced emissions, we find that a BTA entails a higher welfare cost to households.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 3 (May)
Pages: 556-564

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:556-564

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Border tax adjustment Competitiveness Energy-intensive industries General equilibrium Canada;

References

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  1. Mustafa H. Babiker & Thomas F. Rutherford, 2005. "The Economic Effects of Border Measures in Subglobal Climate Agreements," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 99-126.
  2. Ben Lockwood & John Whalley, 2008. "Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?," NBER Working Papers 14025, National Bureau of Economic Research, Inc.
  3. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
  4. Meade, James E, 1974. "A Note on Border-Tax Adjustments," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 1013-15, Sept./Oct.
  5. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
  6. Carraro, Carlo & Siniscalco, Domenico, 1991. "Strategies for the International Protection of the Environment," CEPR Discussion Papers 568, C.E.P.R. Discussion Papers.
  7. Dissou Yazid, 2006. "Efficiency and Sectoral Distributional Impacts of Output-Based Emissions Allowances in Canada," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-33, September.
  8. Kemfert, Claudia, 2004. "Climate coalitions and international trade: assessment of cooperation incentives by issue linkage," Energy Policy, Elsevier, vol. 32(4), pages 455-465, March.
  9. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
  10. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
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Cited by:
  1. ZhongXiang Zhang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," CCEP Working Papers 1208, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  2. Jan T. Mizgajski, 2013. "CO2 Embodied in Trade between Poland and Selected Countries," Journal of Economic Development, Environment and People, Alliance of Central-Eastern European Universities, vol. 2(4), pages 48-60, September.
  3. Ling Tang & Qin Bao & ZhongXiang Zhang & Shouyang Wang, 2013. "Carbon-based Border Tax Adjustments and China's International Trade: Analysis based on a Dynamic Computable General Equilibrium Model," CCEP Working Papers 1301, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  4. Bao, Qin & Tang, Ling & Zhang, ZhongXiang & Wang, Shouyang, 2013. "Impacts of border carbon adjustments on China's sectoral emissions: Simulations with a dynamic computable general equilibrium model," China Economic Review, Elsevier, vol. 24(C), pages 77-94.
  5. Eyland, Terry & Zaccour, Georges, 2014. "Carbon tariffs and cooperative outcomes," Energy Policy, Elsevier, vol. 65(C), pages 718-728.
  6. Henry Thompson, 2013. "Energy Tariffs, Production, and Income in a Small Open Economy," Auburn Economics Working Paper Series auwp2013-11, Department of Economics, Auburn University.

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