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

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  • 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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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): S2 ()
Pages: S198-S207

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:s2:p:s198-s207
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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Cited by:

  1. 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.
  2. 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.
  3. 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).
  4. Thompson, Henry, 2014. "Energy tariffs in a small open economy," Energy Economics, Elsevier, vol. 44(C), pages 63-67.
  5. Ling Tang & Qin Bao & ZhongXiang Zhang & Shouyang Wang, 2013. "Carbon-based Border Tax Adjustments and China’s International Trade: Analysis based on a Dynamic Computable General Equilibrium Model," Working Papers 2013.17, Fondazione Eni Enrico Mattei.
  6. Matthias Weitzel, 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.
  7. 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.
  8. 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.
  9. Alvaro Calzadilla & Ruth Delzeit & Gernot Klepper, 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.
  10. Frédéric Branger & Philippe Quirion, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Post-Print hal-01137932, HAL.
  11. 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).
  12. 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).

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