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Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade

Author

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  • Edward J. Balistreri

    (Iowa State University)

  • Daniel T. Kaffine

    (University of Colorado)

  • Hidemichi Yonezawa

    (Statistics Norway)

Abstract

A country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives. We argue that the strategic component is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory of border adjustments to neutralize the strategic incentive, and consider the remaining environmental incentive in a simplified structure. The theory supports border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions. The theoretic intuition is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law.

Suggested Citation

  • Edward J. Balistreri & Daniel T. Kaffine & Hidemichi Yonezawa, 2019. "Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 1037-1075, November.
    • Handle: RePEc:kap:enreec:v:74:y:2019:i:3:d:10.1007_s10640-019-00359-2
    DOI: 10.1007/s10640-019-00359-2
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    Cited by:

    1. Bellora, Cecilia & Fontagné, Lionel, 2023. "EU in search of a Carbon Border Adjustment Mechanism," Energy Economics, Elsevier, vol. 123(C).
    2. Jakob, Michael, 2021. "Climate policy and international trade – A critical appraisal of the literature," Energy Policy, Elsevier, vol. 156(C).
    3. Fabio Antoniou & Panos Hatzipanayotou & Nikos Tsakiris, 2023. "Regulatory Stringency and Emission Leakage Mitigation," DEOS Working Papers 2302, Athens University of Economics and Business.
    4. George David Banks & Timothy Fitzgerald, 2020. "A sectoral approach allows an artful merger of climate and trade policy," Climatic Change, Springer, vol. 162(2), pages 165-173, September.
    5. Liming Hong & Wei Huang & Sajid Anwar & Xiaofeng Lv, 2023. "North–South asymmetry, unilateral environmental policy and carbon tariffs," Pacific Economic Review, Wiley Blackwell, vol. 28(2), pages 241-266, May.
    6. Perdana, Sigit & Vielle, Marc, 2022. "Making the EU Carbon Border Adjustment Mechanism acceptable and climate friendly for least developed countries," Energy Policy, Elsevier, vol. 170(C).
    7. Steffen, Nico, 2016. "Optimal tariffs and firm technology choice: An environmental approach," DICE Discussion Papers 238, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Nico Steffen, 2021. "Optimal tariffs and firm technology choice: An environmental approach," Review of International Economics, Wiley Blackwell, vol. 29(5), pages 1148-1160, November.
    9. Byeongho Lim & Kyoungseo Hong & Jooyoung Yoon & Jeong-In Chang & Inkyo Cheong, 2021. "Pitfalls of the EU’s Carbon Border Adjustment Mechanism," Energies, MDPI, vol. 14(21), pages 1-18, November.
    10. Steffen, Nico, 2016. "Optimal Tariffs and Firm Technology Choice: An Environmental Approach," VfS Annual Conference 2016 (Augsburg): Demographic Change 145861, Verein für Socialpolitik / German Economic Association.
    11. Menghan Zhang & Suocheng Dong & Fujia Li & Shuangjie Xu & Kexin Guo & Qian Liu, 2022. "Spatial–Temporal Evolution and Improvement Measures of Embodied Carbon Emissions in Interprovincial Trade for Coal Energy Supply Bases: Case Study of Anhui, China," IJERPH, MDPI, vol. 19(24), pages 1-16, December.
    12. Bellora, Cecilia, 2020. "Carbon Border Adjustment and Alternatives," Conference papers 333210, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. Banerjee, Suvajit, 2020. "Border vis-à-vis Domestic Carbon Adjustment: Implications of Alternative System Boundary for India to Reduce Carbon Emissions," Conference papers 333129, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    14. Zhong, Jiarui & Pei, Jiansuo, 2022. "Beggar thy neighbor? On the competitiveness and welfare impacts of the EU's proposed carbon border adjustment mechanism," Energy Policy, Elsevier, vol. 162(C).
    15. Aliénor Cameron & Marc Baudry, 2022. "The case for a Carbon Border Adjustment: Where do economists stand?," Policy Papers 2022.01, FAERE - French Association of Environmental and Resource Economists.
    16. Banerjee, Suvajit, 2021. "Conjugation of border and domestic carbon adjustment and implications under production and consumption-based accounting of India's National Emission Inventory: A recursive dynamic CGE analysis," Structural Change and Economic Dynamics, Elsevier, vol. 57(C), pages 68-86.
    17. Overland, Indra & Sabyrbekov, Rahat, 2022. "Know your opponent: Which countries might fight the European carbon border adjustment mechanism?," Energy Policy, Elsevier, vol. 169(C).
    18. Aliénor Cameron & Marc Baudry, 2023. "The case for carbon leakage and border adjustments: where do economists stand?," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(3), pages 435-469, July.
    19. Aline MORTHA & ARIMURA Toshi H. & TAKEDA Shiro & Tatyana CHESNOKOVA, 2023. "Effect of a European Carbon Border Adjustment Mechanism on the APAC Region: A structural gravity analysis," Discussion papers 23058, Research Institute of Economy, Trade and Industry (RIETI).
    20. Cecilia Bellora & Lionel Fontagné, 2022. "EU in Search of a WTO-Compatible Carbon Border Adjustment Mechanism," Working Papers 2022-01, CEPII research center.
    21. Jeongmeen Suh, 2022. "Carbon border adjustment: a unilateral solution to the multilateral problem?," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 22(4), pages 715-733, December.
    22. Li, Wei & Liu, Xing & Lu, Can, 2023. "Analysis of China's steel response ways to EU CBAM policy based on embodied carbon intensity prediction," Energy, Elsevier, vol. 282(C).
    23. Ambec, Stefan & Esposito, Federico & Pacelli, Antonia, 2023. "The economics of carbon leakage mitigation policies," TSE Working Papers 23-1408, Toulouse School of Economics (TSE), revised Sep 2023.
    24. Katharine Heyl & Felix Ekardt & Paula Roos & Jessica Stubenrauch & Beatrice Garske, 2021. "Free Trade, Environment, Agriculture, and Plurilateral Treaties: The Ambivalent Example of Mercosur, CETA, and the EU–Vietnam Free Trade Agreement," Sustainability, MDPI, vol. 13(6), pages 1-24, March.

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    More about this item

    Keywords

    Climate policy; Border tax adjustments; Carbon leakage; Trade and carbon taxes;
    All these keywords.

    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
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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