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Coordinating Climate and Trade Policies: Pareto Efficiency and the Role of Border Tax Adjustments

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  • Michael Keen

    (International Monetary Fund)

  • Christos Kotsogiannis

    (Department of Economics, University of Exeter)

Abstract

This paper explores the role of trade instruments in globally efficient climate policies, focusing on the central issue of whether border tax adjustment (BTA) is warranted when carbon prices differ internationally. It shows that tariff policy has a role in easing cross-country distributional concerns that can make non-uniform carbon pricing efficient, and that Pareto-efficiency requires a form of BTA when carbon taxes in some countries are constrained, a special case being identified in which this has the simple structure envisaged in practical policy discussion. It also stresses—a point that has been overlooked in the policy debate—that the case for BTA depends critically on whether climate policies are pursued by carbon taxation or by cap-and-trade.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1106.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1106.

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Date of creation: 2011
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Handle: RePEc:exe:wpaper:1106

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Keywords: Environmental taxation; cap-and-trade; international trade; Pareto efficiency; border tax adjustments.;

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References

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  1. Ian Sheldon, 2006. "Trade and Environmental Policy: A Race to the Bottom?," Journal of Agricultural Economics, Wiley Blackwell, vol. 57(3), pages 365-392.
  2. Michael O. Moore, 2011. "Implementing Carbon Tariffs: A Fool’s Errand?," The World Economy, Wiley Blackwell, vol. 34(10), pages 1679-1702, October.
  3. Graciela Chichilnisky & Geoffrey Heal, 1993. "Who Should Abate Carbon Emissions? An International Viewpoint," NBER Working Papers 4425, National Bureau of Economic Research, Inc.
  4. Copeland Brian R., 1994. "International Trade and the Environment: Policy Reform in a Polluted Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 44-65, January.
  5. Arik Levinson & M. Scott Taylor, 2004. "Unmasking the Pollution Haven Effect," NBER Working Papers 10629, National Bureau of Economic Research, Inc.
  6. 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.
  7. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
  8. Arja H. Turunen-Red & Alan D. Woodland, 2004. "Multilateral Reforms of Trade and Environmental Policy," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 321-336, 08.
  9. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  10. Daniel Gros, 2009. "Global Welfare Implications of Carbon Border Taxes," CESifo Working Paper Series 2790, CESifo Group Munich.
  11. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  12. Turunen-Red, Arja H. & Woodland, Alan D., 1988. "On the multilateral transfer problem : Existence of Pareto improving international transfers," Journal of International Economics, Elsevier, vol. 25(3-4), pages 249-269, November.
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Cited by:
  1. Gustav Engstrom & William Brock & Anastasios Xepapadeas, . "Spatial Climate-Economic Models in the Design of Optimal Climate Policies across Locations," DEOS Working Papers 1224, Athens University of Economics and Business.
  2. Brock, William A. & Engström, Gustav & Grass, Dieter & Xepapadeas, Anastasios, 2013. "Energy balance climate models and general equilibrium optimal mitigation policies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2371-2396.
  3. Gori, Giuseppe Francesco & Lambertini, Luca, 2013. "Trade liberalisation between asymmetric countries with environmentally concerned consumers," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 549-560.
  4. Gustav Engstrom & William Brock & Anastasios Xepapadeas, 2012. "Energy Balance Climate Models and the Spatial Structure of Optimal Mitigation Policies," DEOS Working Papers 1202, Athens University of Economics and Business.

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