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

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  • Balistreri, Edward J.
  • Kaffine, Daniel
  • Yonezawa, Hidemichi

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 simpli_x000c_ed 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 effcient environmental policy and consistency with international trade law.

Suggested Citation

  • Balistreri, Edward J. & Kaffine, Daniel & Yonezawa, Hidemichi, 2020. "Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade," Conference papers 333219, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:333219
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    JEL classification:

    • 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
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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