Carbon Bias of Tariffs: Are Fossil fuels the Culprits?

This paper revisits the existence of a carbon bias in trade policies, where emissions-intensive sectors receive lower trade protection than cleaner sectors. Using a stylized general equilibrium model that accounts for greenhouse gas emissions, we confirm the presence of a carbon bias but find it to be significantly smaller than previously estimated. Our analysis reveals that this bias is primarily driven by low tariffs on fossil fuels, particularly crude oil. Incorporating the finite nature of fossil fuel resources into the model reduces the responsiveness of fossil fuel production to tariff changes, effectively neutralizing the carbon bias. Furthermore, when accounting for domestic consumption taxes on fossil fuels in non-producing countries –which act as de facto tariffs– the bias shifts toward a pro-environmental stance. These findings underscore the importance of integrating energy markets' specificities and domestic distortions into trade models to better account for the impact of trade policies on the environment.