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Fair, Optimal or Detrimental? Environmental vs. Strategic Use of Border Carbon Adjustment

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  • Matthias Weitzel
  • Michael Hübler
  • Sonja Peterson

Abstract

We carry out a detailed sensitivity analysis of border carbon adjustment (rates) by applying a global Computable General Equilibrium (CGE) GTAP7-based model. We find different incentives for the regions in the climate coalition to raise carbon-based border tax rates (BTAX) above the standard rate that mimics an equalisation of carbon prices across regions. Herein, the strategic use of BTAX (the manipulation of the terms of trade) is stronger for all coalition regions than the environmental use (the reduction of carbon emissions abroad). Higher BTAX can reduce carbon leakage but with a declining marginal effect. Furthermore, we find different incentives for regions outside the coalition to oppose high BTAX rates: Russia and the other energy exporters would oppose it, while the Low-Income Countries would not because of benefits from the trade diversion effect. Thus, BTAX encourages the former to join the coalition, while compensating transfers are necessary to encourage the other (developing) countries including China and India

Suggested Citation

  • Matthias Weitzel & Michael Hübler & Sonja Peterson, 2012. "Fair, Optimal or Detrimental? Environmental vs. Strategic Use of Border Carbon Adjustment," Kiel Working Papers 1792, Kiel Institute for the World Economy.
  • Handle: RePEc:kie:kieliw:1792
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    File URL: https://www.ifw-members.ifw-kiel.de/publications/fair-optimal-or-detrimental-environmental-vs-strategic-use-of-border-carbon-adjustment/kwp%201792.pdf
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    More about this item

    Keywords

    climate policy; border tax adjustment; leakage; trade diversion; coalitions; general equilibrium mod;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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