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Pollution Control, Competitiveness, and Border Tax Adjustment

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Author Info

  • Yazid Dissou

    ()
    (Department of Economics, University of Ottawa, Ottawa, ON)

Abstract

This paper explores in a general equilibrium framework the welfare and sectoral implications of an optimally designed system of border tax adjustments (BTA) on the imports of energy-intensive industries. Recently, several propositions have been made by policy makers and researchers to use BTA as a restrictive trade policy instrument to address the loss of competitiveness induced by unilateral stringent domestic pollution control policies. In this paper, we define the loss of competitiveness not as a loss of output by domestic energy-intensive producers, but instead as a loss of their market shares. We argue and we show using the Canadian economy as illustration that the most often proposed BTA, which is based on the carbon embodiment of the import good, may under- or over-achieve the objective of addressing the competitive disadvantage of domestic energy-intensive industries. In some cases, the proposed BTA may over protect the domestic energy-intensive industries by providing implicit subsidies as they might even increase their production in the presence of carbon taxes. Similarly, the proposed BTA may fail to fully restore the competitiveness of domestic producers, vis-à-vis their foreign peers. We determine the optimal BTAs on imports that fully restore the competitiveness of domestic firms following unilateral stringent pollution control policies. The ‘optimal’ BTAs take into consideration the general equilibrium effects of the carbon tax and of the import charges on the prices of domestic goods. In most cases, the impact their impact on import prices is higher than in the previous case. As a consequence, they entail higher distortions on resource allocation in the economy and hence higher welfare cost to households.

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File URL: http://www.socialsciences.uottawa.ca/sites/default/files/public/eco/eng/documents/0911E.pdf
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Bibliographic Info

Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0911E.

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Length: 24 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ott:wpaper:0911e

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Related research

Keywords: Border tax adjustment; competitiveness; energy-intensive industries; general equilibrium; Canada.;

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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.
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Cited by:
  1. Alain-Désiré Nimubona & Horatiu Rus, 2011. "Green Technology Transfers and Border Tax Adjustments," Working Papers 1102, University of Waterloo, Department of Economics, revised May 2011.

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