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Coordinating Climate and Trade Policies; Pareto Efficiency and the Role of Border Tax Adjustments

  • Michael Keen
  • Christos Kotsogiannis

This paper explores the role of trade instruments in globally efficient climate policies, focusing on the central issue of whether some form of border tax adjustment (BTA) is warranted when carbon prices differ internationally. It shows that tariff policy has a role in easing cross-country distributional concerns that can make non-uniform carbon pricing efficient and, more particularly, that Pareto-efficiency requires a form of BTA when carbon taxes in some countries are constrained, a special case being identified in which this has the simple structure envisaged in practical policy discusions. It also stresses—a point that has been overlooked in the policy debate—that the efficiency case for BTA depends critically on whether climate policies are pursued by carbon taxation or by cap-and-trade.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/289.

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Length: 26
Date of creation: 07 Dec 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/289
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  1. Daniel Osberghaus & Christiane Reif, 2010. "Total Costs and Budgetary Effects of Adaptation to Climate Change: An Assessment for the European Union," CESifo Working Paper Series 3143, CESifo Group Munich.
  2. Arik Levinson & M. Scott Taylor, 2008. "Unmasking The Pollution Haven Effect," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 223-254, 02.
  3. Hoel, Michael, 1994. "Should a Carbon Tax be Differentiated Across Sectors?," CEPR Discussion Papers 1066, C.E.P.R. Discussion Papers.
  4. Falvey, Rodney E., 1988. "Tariffs, quotas and piecemeal policy reform," Journal of International Economics, Elsevier, vol. 25(1-2), pages 177-183, August.
  5. Daniel Gros, 2009. "Global Welfare Implications of Carbon Border Taxes," CESifo Working Paper Series 2790, CESifo Group Munich.
  6. Chichilnisky, Graciela & Heal, Geoffrey, 1994. "Who should abate carbon emissions? : An international viewpoint," Economics Letters, Elsevier, vol. 44(4), pages 443-449, April.
  7. Kotsogiannis, Christos & Woodland, Alan, 2013. "Climate and international trade policies when emissions affect production possibilities," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 166-184.
  8. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  9. Michael O. Moore, 2011. "Implementing Carbon Tariffs: A Fool’s Errand?," The World Economy, Wiley Blackwell, vol. 34(10), pages 1679-1702, October.
  10. Stiglitz Joseph, 2006. "A New Agenda for Global Warming," The Economists' Voice, De Gruyter, vol. 3(7), pages 1-4, July.
  11. Turunen-Red, Arja H. & Woodland, Alan D., 1988. "On the multilateral transfer problem : Existence of Pareto improving international transfers," Journal of International Economics, Elsevier, vol. 25(3-4), pages 249-269, November.
  12. Copeland,B.R. & Scott Taylor,M., 2003. "Trade, growth and the environment," Working papers 10, Wisconsin Madison - Social Systems.
  13. Jota Ishikawa & Kazuharu Kiyono, 2006. "Greenhouse-Gas Emission Controls In An Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 431-450, 05.
  14. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
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  16. repec:cup:cbooks:9780521322249 is not listed on IDEAS
  17. repec:clg:wpaper:2008-02 is not listed on IDEAS
  18. Ben Lockwood & John Whalley, 2010. "Carbon-motivated Border Tax Adjustments: Old Wine in Green Bottles?," The World Economy, Wiley Blackwell, vol. 33(6), pages 810-819, 06.
  19. J. Peter Neary, 2000. "International Trade and the Environment - Theoretical and Policy Linkages," Working Papers 200018, School of Economics, University College Dublin.
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  21. Ian Sheldon, 2006. "Trade and Environmental Policy: A Race to the Bottom?," Journal of Agricultural Economics, Wiley Blackwell, vol. 57(3), pages 365-392.
  22. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
  23. Arja H. Turunen-Red & Alan D. Woodland, 2004. "Multilateral Reforms of Trade and Environmental Policy," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 321-336, 08.
  24. Copeland Brian R., 1994. "International Trade and the Environment: Policy Reform in a Polluted Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 44-65, January.
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