IDEAS home Printed from https://ideas.repec.org/p/bon/boncrc/crctr224_2024_495v3.html
   My bibliography  Save this paper

Designing Effective Carbon Border Adjustment with Minimal Information Requirements: Theory and Evidence

Author

Listed:
  • Alessia Camplomi
  • Harald Fadinger
  • Chiara Forlati
  • Sabine Stillger
  • Ulrich J. Wagner

Abstract

Carbon leakage undermines the effectiveness of unilateral carbon pricing. Taxes on import-embedded emissions, like the EU’s CBAM, prevent leakage but their product coverage is limited due to strong information asymmetries. We propose an alternative policy (LBAM) that sterilizes carbon leakage without requiring information on foreign carbon intensities. In a quantitative trade model, LBAM tariffs significantly improve over the EU’s CBAM in terms of global emissions and EU welfare. Importantly, LBAM avoids large welfare losses among EU trading partners that would result if CBAM were extended to all sectors. Combining LBAM tariffs with equivalent export subsidies reinforces these advantages.

Suggested Citation

  • Alessia Camplomi & Harald Fadinger & Chiara Forlati & Sabine Stillger & Ulrich J. Wagner, 2024. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements: Theory and Evidence," CRC TR 224 Discussion Paper Series crctr224_2024_495v3, University of Bonn and University of Mannheim, Germany, revised Jul 2025.
    • Handle: RePEc:bon:boncrc:crctr224_2024_495v3
    as

    Download full text from publisher

    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp495
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andreas Gerster & Stefan Lamp, 2024. "Energy Tax Exemptions and Industrial Production," The Economic Journal, Royal Economic Society, vol. 134(663), pages 2803-2834.
    2. Joachim Wagner, 2010. "Estimated Capital Stock Values for German Manufacturing Enterprises Covered by the Cost Structure Surveys," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 130(3), pages 403-408.
    3. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    4. Rahel Aichele & Gabriel Felbermayr, 2015. "Kyoto and Carbon Leakage: An Empirical Analysis of the Carbon Content of Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 104-115, March.
    5. Petrick Sebastian & Rehdanz Katrin & Wagner Ulrich J., 2011. "Energy Use Patterns in German Industry: Evidence from Plant-level Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(3), pages 379-414, June.
    6. U.J. Wagner & D. Kassem & A. Gerster & J. Jaraite-Kazukauske & M. Klemetsen & M. Laukkanen & J. Leisner & R. Martin & J.R. Munch & M. Muûls & A.T. Nielsen & L. de Preux & K.E. Rosendahl & S. Schusser, 2020. "Carbon Footprints of European Manufacturing Jobs: Stylized Facts and Implications for Climate Policy," CRC TR 224 Discussion Paper Series crctr224_2020_250, University of Bonn and University of Mannheim, Germany.
    7. Soderbery, Anson, 2015. "Estimating import supply and demand elasticities: Analysis and implications," Journal of International Economics, Elsevier, vol. 96(1), pages 1-17.
    8. Meredith Fowlie & Mar Reguant, 2018. "Challenges in the Measurement of Leakage Risk," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 124-129, May.
    9. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    10. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
    11. Larch, Mario & Wanner, Joschka, 2017. "Carbon tariffs: An analysis of the trade, welfare, and emission effects," Journal of International Economics, Elsevier, vol. 109(C), pages 195-213.
    12. Ralph Ossa, 2014. "Trade Wars and Trade Talks with Data," American Economic Review, American Economic Association, vol. 104(12), pages 4104-4146, December.
    13. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    14. Ambec, Stefan & Esposito, Federico & Pacelli, Antonia, 2024. "The economics of carbon leakage mitigation policies," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    15. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    16. repec:hal:journl:hal-04755371 is not listed on IDEAS
    17. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
    18. Kevin Rennert & Frank Errickson & Brian C. Prest & Lisa Rennels & Richard G. Newell & William Pizer & Cora Kingdon & Jordan Wingenroth & Roger Cooke & Bryan Parthum & David Smith & Kevin Cromar & Dela, 2022. "Comprehensive evidence implies a higher social cost of CO2," Nature, Nature, vol. 610(7933), pages 687-692, October.
    19. Christoph Böhringer & Carolyn Fischer & Knut Einar Rosendahl & Thomas Fox Rutherford, 2022. "Author Correction: Potential impacts and challenges of border carbon adjustments," Nature Climate Change, Nature, vol. 12(4), pages 408-408, April.
    20. Farid Farrokhi & Ahmad Lashkaripour, 2025. "Can Trade Policy Mitigate Climate Change?," Econometrica, Econometric Society, vol. 93(5), pages 1561-1599, September.
    21. A. Denny Ellerman & Claudio Marcantonini & Aleksandar Zaklan, 2016. "The European Union Emissions Trading System: Ten Years and Counting," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 89-107.
    22. Sabine Stillger, 2025. "The Role of Firm Heterogeneity and Intermediate Inputs in Carbon Leakage," CRC TR 224 Discussion Paper Series crctr224_2025_670, University of Bonn and University of Mannheim, Germany.
    23. Qiaoyi Chen & Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2025. "Regulating Conglomerates: Evidence from an Energy Conservation Program in China," American Economic Review, American Economic Association, vol. 115(2), pages 408-447, February.
    24. James R. MARKUSEN, 2021. "International Externalities And Optimal Tax Structures," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 16, pages 341-355, World Scientific Publishing Co. Pte. Ltd..
    25. Meredith L. Fowlie & Mar Reguant, 2022. "Mitigating Emissions Leakage in Incomplete Carbon Markets," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(2), pages 307-343.
    26. Aaron Cosbey & Susanne Droege & Carolyn Fischer & Clayton Munnings, 2019. "Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 13(1), pages 3-22.
    27. Wooldridge, Jeffrey M., 2009. "On estimating firm-level production functions using proxy variables to control for unobservables," Economics Letters, Elsevier, vol. 104(3), pages 112-114, September.
    28. William Nordhaus, 2015. "Climate Clubs: Overcoming Free-Riding in International Climate Policy," American Economic Review, American Economic Association, vol. 105(4), pages 1339-1370, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:bon:boncrc:crctr224_2024_495v2 is not listed on IDEAS
    2. repec:bon:boncrc:crctr224_2024_495 is not listed on IDEAS
    3. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara & Stillger, Sabine & Wagner, Ulrich, 2023. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics," CEPR Discussion Papers 18645, C.E.P.R. Discussion Papers.
    4. Ambec, Stefan & Esposito, Federico & Pacelli, Antonia, 2024. "The economics of carbon leakage mitigation policies," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    5. Filippo Maria D'Arcangelo & Marzio Galeotti, 2022. "Environmental Policy and Investment Location: The Risk of Carbon Leakage in the EU ETS," Working Papers 2022.27, Fondazione Eni Enrico Mattei.
    6. D'Arcangelo, Maria Filippo & Galeotti, Marzio, "undated". "Environmental Policy and Investment Location: The Risk of Carbon Leakage in the EU ETS," FEEM Working Papers 327158, Fondazione Eni Enrico Mattei (FEEM).
    7. Beat Hintermann & Maja Žarković & Corrado Di Maria & Ulrich J. Wagner, 2020. "The Effect of Climate Policy on Productivity and Cost Pass-Through in the German Manufacturing Sector," CRC TR 224 Discussion Paper Series crctr224_2020_249, University of Bonn and University of Mannheim, Germany.
    8. Geoffrey Barrows & Hélène Ollivier & Ariell Reshef, 2023. "Production Function Estimation with Multi-Destination Firms," CESifo Working Paper Series 10716, CESifo.
    9. Massimiliano Calì & Marco Le Moglie & Giorgio Presidente, 2024. "Gain without pain? Non‐tariff measures, plant markup, and productivity," Review of International Economics, Wiley Blackwell, vol. 32(3), pages 1364-1397, August.
    10. Dy, Kenneth Bicol & Yang, Han, 2025. "Global emissions and international trade: Quantifying the impact of carbon border adjustments," Energy Economics, Elsevier, vol. 145(C).
    11. Mary Amiti & Mi Dai & Robert C. Feenstra & John Romalis, 2017. "How did China’s WTO entry benefit U.S. prices?," Staff Reports 817, Federal Reserve Bank of New York.
    12. Richter, Philipp M. & Schiersch, Alexander, 2017. "CO2 emission intensity and exporting: Evidence from firm-level data," European Economic Review, Elsevier, vol. 98(C), pages 373-391.
    13. Philipp Meinen & Ana Cristina Soares, 2022. "Markups and Financial Shocks," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2471-2499.
    14. Stiebale, Joel & Vencappa, Dev, 2018. "Acquisitions, markups, efficiency, and product quality: Evidence from India," Journal of International Economics, Elsevier, vol. 112(C), pages 70-87.
    15. Amiti, Mary & Dai, Mi & Feenstra, Robert & Romalis, John, 2017. "How Did China's WTO Entry Benefit U.S. Consumers?," CEPR Discussion Papers 12076, C.E.P.R. Discussion Papers.
    16. He, Ling-Yun & Chen, Kun-Xian, 2023. "Does China's regional emission trading scheme lead to carbon leakage? Evidence from conglomerates," Energy Policy, Elsevier, vol. 175(C).
    17. Amiti, Mary & Dai, Mi & Feenstra, Robert C. & Romalis, John, 2020. "How did China's WTO entry affect U.S. prices?," Journal of International Economics, Elsevier, vol. 126(C).
    18. Jia, Zhijie & Wu, Rongxin & Liu, Yu & Wen, Shiyan & Lin, Boqiang, 2024. "Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?," Ecological Economics, Elsevier, vol. 220(C).
    19. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    20. Jakob, Michael, 2021. "Climate policy and international trade – A critical appraisal of the literature," Energy Policy, Elsevier, vol. 156(C).
    21. Javier Flórez Mendoza & Oliver Reiter & Robert Stehrer, 2024. "EU carbon border tax: General equilibrium effects on income and emissions," wiiw Working Papers 254, The Vienna Institute for International Economic Studies, wiiw.
    22. Larch, Mario & Wanner, Joschka, 2024. "The consequences of non-participation in the Paris Agreement," Open Access Publications from Kiel Institute for the World Economy 307097, Kiel Institute for the World Economy (IfW Kiel).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F64 - International Economics - - Economic Impacts of Globalization - - - 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bon:boncrc:crctr224_2024_495v3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRC Office (email available below). General contact details of provider: https://www.crctr224.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.