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Reconciling Climate Change and Trade Policy

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  • Aaditya Mattoo
  • Arvind Subramanian
  • Dominique van der Mensbrugghe
  • Jianwu He

Abstract

There is growing clamor in industrial countries for additional border taxes on imports from countries with lower carbon prices. A key factor affecting the impact of these taxes is whether they are based on the carbon content of imports or the carbon content in domestic production. Our quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high income countries but with serious consequences for trading partners. For example, China’s manufacturing exports would decline by one-fifth and those of all low- and middle-income countries by 8 percent; the corresponding declines in real income would be 3.7 percent and 2.4 percent. In contrast, border tax adjustment based on the carbon content in domestic production, especially if applied to both imports and exports, would broadly address the competitiveness concerns of producers in high income countries without seriously damaging developing-country trade. Therefore, as part of a comprehensive agreement on climate change, new WTO rules could be negotiated that would prohibit the extreme form of action while possibly allowing trade actions based on domestic carbon content as a safety valve.

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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 189.

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Length: 45 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:cgd:wpaper:189

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Web page: http://www.cgdev.org

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Keywords: trade; trade policy; environment; climate change;

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