On interactions of optimal climate policy and international trade. An assessment of border carbon measures

Not only after the failure of the Copenhagen climate conference 2009, border carbon adjustment (BCA) has received growing attention in the climate policy debate as a measure to combat "carbon leakage" and force non-abating countries to tighter climate policies. In this paper, we study the strategic interactions between international trade and climate policy with a focus on the effectiveness of border measures. First, we analyze the main principles of unilateral climate policy with international trade in a small analytical model. Second, we examine welfare effects of WTO compatible carbon import tariffs in a stylized numerical integrated assessment model with explicit trade in commodities and analyze if BCA is a credible threat to force non-abating countries to implement stricter climate policies. We show that the terms of trade effects can, depending on trade patterns, ease or boost the prisoners dilemma of mitigating greenhouse gases. We further demonstrate that WTO conform BCA increases the effectiveness of climate policy and forces trading partners to reduce emissions. But as the results of the numerical model illustrate, welfare effects are depended on trade flows and are negative for realistic parameter values.