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Fair, optimal or detrimental? Environmental vs. strategic use of border carbon adjustment

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Listed author(s):
  • Weitzel, Matthias
  • Hübler, Michael
  • Peterson, Sonja

Abstract

We carry out a detailed sensitivity analysis of border carbon adjustment (rates) by applying a global computable general equilibrium (CGE) GTAP7-based model. We find different incentives for the regions in the climate coalition to raise carbon-based border tax rates (BTAX) above the standard rate that mimics an equalisation of carbon prices across regions. Herein, the strategic use of BTAX (the manipulation of the terms of trade) is stronger for all coalition regions than the environmental use (the reduction of carbon emissions abroad). Higher BTAX can reduce carbon leakage but with a declining marginal effect. Furthermore, we find different incentives for regions outside the coalition to oppose high BTAX rates: Russia and the other energy exporters would oppose it, while the low-income countries would not because of benefits from the trade diversion effect. Thus, BTAX encourages the former to join the coalition, while compensating transfers are necessary to encourage the other (developing) countries including China and India.

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File URL: http://www.sciencedirect.com/science/article/pii/S0140988312001934
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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): S2 ()
Pages: 198-207

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:s2:p:s198-s207
DOI: 10.1016/j.eneco.2012.08.023
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

Keywords: Climate policy; Border tax adjustment; Leakage; Trade diversion; Coalitions; General equilibrium model;

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Find related papers by JEL classification:
  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
  • F18 - International Economics - - Trade - - - Trade and Environment
  • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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  1. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
  2. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
  3. 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.
  4. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 4, pages 45-51 World Scientific Publishing Co. Pte. Ltd..
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Cited by:

  1. Matthias Weitzel, 2017. "The role of uncertainty in future costs of key CO2 abatement technologies: a sensitivity analysis with a global computable general equilibrium model," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 22(1), pages 153-173, January.
  2. Ling Tang & Qin Bao & ZhongXiang Zhang & Shouyang Wang, 2015. "Carbon-based border tax adjustments and China’s international trade: analysis based on a dynamic computable general equilibrium model," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(2), pages 329-360, April.
  3. Branger, Frédéric & Quirion, Philippe, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Ecological Economics, Elsevier, vol. 99(C), pages 29-39.
  4. Bollen, Johannes, 2015. "The value of air pollution co-benefits of climate policies: Analysis with a global sector-trade CGE model called WorldScan," Technological Forecasting and Social Change, Elsevier, vol. 90(PA), pages 178-191.
  5. Burmeister, Johannes & Peterson, Sonja, 2016. "National climate policies in times of the European Union Emissions Trading System (EU ETS)," Kiel Working Papers 2052, Kiel Institute for the World Economy (IfW).
  6. Hübler, Michael & Voigt, Sebastian & Löschel, Andreas, 2014. "Designing an emissions trading scheme for China—An up-to-date climate policy assessment," Energy Policy, Elsevier, vol. 75(C), pages 57-72.
  7. Peterson, Sonja & Weitzel, Matthias, 2014. "Reaching a climate agreement: Do we have to compensate for energy market effects of climate policy?," Kiel Working Papers 1965, Kiel Institute for the World Economy (IfW).
  8. Calzadilla, Alvaro & Delzeit, Ruth & Klepper, Gernot, 2014. "DART-BIO: Modelling the interplay of food, feed and fuels in a global CGE model," Kiel Working Papers 1896, Kiel Institute for the World Economy (IfW).
  9. Henry Thompson, 2013. "Energy Tariffs, Production, and Income in a Small Open Economy," Auburn Economics Working Paper Series auwp2013-11, Department of Economics, Auburn University.
  10. Schinko, Thomas & Bednar-Friedl, Birgit & Steininger, Karl W. & Grossmann, Wolf D., 2014. "Switching to carbon-free production processes: Implications for carbon leakage and border carbon adjustment," Energy Policy, Elsevier, vol. 67(C), pages 818-831.
  11. Böhringer, Christoph & Schneider, Jan & Asane-Otoo, Emmanuel, 2016. "Trade In Carbon And The Effectiveness Of Carbon Tariffs," Annual Conference 2016 (Augsburg): Demographic Change 145628, Verein für Socialpolitik / German Economic Association.
  12. Weitzel, Matthias, 2014. "Worse off from reduced cost? The role of policy design under uncertain technological advancement," Kiel Working Papers 1926, Kiel Institute for the World Economy (IfW).
  13. Weitzel, Matthias & Peterson, Sonja, 2012. "Border carbon adjustment: Not a very promising climate policy instrument," Kiel Policy Brief 55, Kiel Institute for the World Economy (IfW).
  14. Thompson, Henry, 2014. "Energy tariffs in a small open economy," Energy Economics, Elsevier, vol. 44(C), pages 63-67.
  15. Matthias Weitzel, 2017. "Who gains from technological advancement? The role of policy design when cost development for key abatement technologies is uncertain," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(1), pages 151-181, January.

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