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Global Welfare Implications of Carbon Border Taxes

  • Daniel Gros

This paper presents a simple, basic model to compute the welfare consequences of the introduction of a tariff on the CO2 content of imported goods in a country that already imposes a domestic carbon tax. The main finding is that the introduction of a carbon import tariff increases global welfare (and not just the welfare of the importing country) if there is no (or insufficient) pricing of carbon abroad. A higher domestic price of carbon justifies a higher import tariff. Moreover, a higher relative intensity of carbon abroad increases the desirability of high import tariff imposed by the home country because a border tax shifts production to the importing country, which in this case leads to lower environmental costs.If both instruments are used to maximise global welfare, the optimal domestic price for carbon should be higher than the external effects (assuming that there is no carbon pricing in the rest of the world) and the optimal tariff rate would be somewhat lower than the domestic carbon price.If the importing country has a fixed ceiling on emissions instead of a constant carbon price (as provided under the EU’s Emissions Trading System), an import tariff is always beneficial from a global point of view and its imposition lowers the price of domestic allowances, but less than proportionally.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2790.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2790
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  1. Gary Clyde Hufbauer & Steve Charnovitz & Jisun Kim, 2009. "Global Warming and the World Trading System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4280, December.
  2. Philippe Quirion & Damien Demailly, 2006. "Leakage from climate policies and border tax adjustment:lessons from a geographic model of the cement industry," CIRED Working Papers halshs-00009337, HAL.
  3. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  4. Paul Veenendaal & Ton Manders, 2008. "Border tax adjustment and the EU-ETS, a quantitative assessment," CPB Document 171, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Warwick J. McKibbin & Peter J. Wilcoxen, 2009. "The Economic And Environmental Effects Of Border Tax Adjustments For Climate Policy," CAMA Working Papers 2009-09, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
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