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Principles for Pareto Efficient Border Carbon Adjustment

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  • Michael Keen
  • Christos Kotsogiannis

Abstract

Border Carbon Adjustment Mechanisms (BCAMs) are becoming reality in the EU and elsewhere, and recur—in very different form—in U.S. legislative proposals. But they remain contentious, with features and differences that leave the underlying welfare rationale and implications unclear. Exploring these, this paper establishes two general principles for Pareto efficient BCAM design: regulatory measures should be recognized symmetrically with explicit carbon prices; and, whatever the ambition of mitigation in the BCA-imposing country, a general ‘difference-in-differences’ form of a BCAM is appropriate. These nest, as special cases, the very different approaches to BCAM design in Europe and the U.S.

Suggested Citation

  • Michael Keen & Christos Kotsogiannis, 2024. "Principles for Pareto Efficient Border Carbon Adjustment," CESifo Working Paper Series 11016, CESifo.
    • Handle: RePEc:ces:ceswps:_11016
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    References listed on IDEAS

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    1. Tatsuo Hatta, 1977. "A Theory of Piecemeal Policy Recommendations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(1), pages 1-21.
    2. Kimberly A. Clausing & Catherine Wolfram, 2023. "Carbon Border Adjustments, Climate Clubs, and Subsidy Races When Climate Policies Vary," Journal of Economic Perspectives, American Economic Association, vol. 37(3), pages 137-162, Summer.
    3. 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.
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F18 - International Economics - - Trade - - - Trade and Environment

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