Potential economic impacts of carbon tariffs on target countries: a systematic review

Carbon tariffs have been proposed to mitigate carbon leakage and industrial competitiveness losses due to uneven abatement efforts across countries. However, this raises concerns about the possible economic impacts on target countries and the associated issue of fair share of CO2 abatement burdens. This study presents a systematic review of potential economic impacts of carbon tariffs on target countries, based on 109 peer-reviewed articles published from 2010 to May 2024. On balance, studies consistently report that carbon tariffs would adversely affect the economy of target countries. However, it is difficult to generalize about the extent of such impacts in a quantitative way due to the differences in scenario setting in different studies, which varies by implementing countries, target countries, and specific carbon tariff design like tariff rates and the scope of emissions, as well as by indicators used to measure economic impacts. Studies discuss measures that implementing or target countries can take to mitigate such economic impacts, like recycling revenues to target countries, practicing trade retaliation, and making ambitious CO2 abatement policies. However, studies lack solid findings on the effectiveness of these measures. The associated issue of fair share of CO2 abatement burdens was not discussed much in these studies plausibly due to its normative nature. Future research should be directed to systematically quantify potential economic impacts of carbon tariffs by using scenarios that reflect the dynamic global economic and trade changes, evaluate the effectiveness of various measures for alleviating the economic impacts, and explore equity issues associated with carbon tariffs using both normative and positive approaches.Key policy insights Carbon tariffs would adversely affect the economy of target countries; the extent of the economic impacts is contingent on factors like the specific designs of carbon tariffs.Measures like recycling revenues to target countries have been proposed to alleviate adverse economic impacts. However, the effectiveness of such measures needs to be further assessed.The issue of fair share of CO2 abatement burdens associated with levying carbon tariffs, which has been inadequately studied and discussed, may cast a cloud on the implementation of carbon tariffs.