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On the Design of a Carbon Border Adjustment Mechanism

Author

Listed:
  • Martin Richardson

    (Research School of Economics, The Australian National University, Canberra)

  • Frank Stahler

    (School of Business and Economics, University of Tubingen, Tubingen, Germany)

  • Halis Murat Yildiz

    (Department of Economics, Toronto Metropolitan University, Toronto, Canada)

Abstract

We identify a condition in a general equilibrium model of trade with tariff bindings under which a customs union (CU) can design a carbon border adjustment mechanism (CBAM) that induces other countries to adopt the CU's carbon tax. Trade liberalization makes this easier and so would help the CU `export' its climate policies. We then show that, in an inter-industry, perfectly competitive framework with competing exporters, the optimal carbon tax is lower when the CU maximizes CU welfare than if it were to maximize global welfare. Furthermore, the CU optimally raises its tariff threat via CBAM by less than the difference in member and non-member environmental taxes. By contrast, in an intra-industry oligopoly model of trade with profit shifting incentives, we find the opposite result, with a "penalty" tariff threat that exceeds the difference in carbon taxes.

Suggested Citation

  • Martin Richardson & Frank Stahler & Halis Murat Yildiz, 2026. "On the Design of a Carbon Border Adjustment Mechanism," Working Papers 098, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp098
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    References listed on IDEAS

    as
    1. Lake, James & Yildiz, Halis M., 2016. "On the different geographic characteristics of Free Trade Agreements and Customs Unions," Journal of International Economics, Elsevier, vol. 103(C), pages 213-233.
    2. Michael Keen & Christos Kotsogiannis, 2024. "Principles for Pareto Efficient Border Carbon Adjustment," CESifo Working Paper Series 11016, CESifo.
    3. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-737, September.
    4. James R. MARKUSEN, 2021. "International Externalities And Optimal Tax Structures," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 16, pages 341-355, World Scientific Publishing Co. Pte. Ltd..
    5. Lake, James & Nken, Moïse & Yildiz, Halis Murat, 2020. "Tariff bindings and the dynamic formation of Preferential Trade Agreements," Journal of International Economics, Elsevier, vol. 122(C).
    6. Peter H. Howard & Thomas Sterner, 2017. "Few and Not So Far Between: A Meta-analysis of Climate Damage Estimates," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(1), pages 197-225, September.
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