Trade in Carbon and The Effectiveness of Carbon Tariffs

In the absence of a global agreement to reduce CO2 emissions single countries or regions have introduced subglobal climate policies. One major challenge associated with unilateral action is carbon leakage, i.e., the relocation of emissions from regulated to unregulated regions. A principal measure to combat carbon leakage is carbon tariffs, where embodied emissions in imports are taxed at the domestic CO2 price when crossing the border. Using combined MRIO and computable general equilibrium (CGE) analysis for the years from 1995 to 2007 based on data provided by World Input-Output Database (WIOD), we assess the potential of carbon tariffs as a means of improving the global cost-effectiveness of unilateral emission pricing. Our MRIO analysis shows increasing relevance of embodied carbon in trade. Both imports of embodied carbon in OECD countries and exports of embodied carbon from developing countries have increased substantially. However, our CGE policy simulations suggest that the effectiveness of carbon tariffs does not increase over time but the burden shifting potential from OECD to Non-OECD countries increases.