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Carbon control policies, competitiveness, and border tax adjustments

  • Dissou, Yazid
  • Eyland, Terry

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. 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.
  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. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
  4. 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.
  5. 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.
  6. 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.
  7. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc.
  8. 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.
  9. Carraro, Carlo & Siniscalco, Domenico, 1993. "Strategies for the international protection of the environment," Journal of Public Economics, Elsevier, vol. 52(3), pages 309-328, October.
  10. 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.
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