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How Large are the Impacts of Carbon Motivated Border Tax Adjustments?

This paper discusses the size of impact of carbon motivated border tax adjustments on world trade. We report numerical simulation results which suggest that impacts on welfare, trade, and emissions will likely be small. This is because proposed measures use carbon emissions in the importing country in producing goods similar to imports rather than carbon content in calculating the size of barriers. Moreover, because border adjustments involve both tariffs and export rebates, it is the differences in emissions intensity across sector rather than emissions level which matters. Where there is no difference in emissions intensities across sectors, Lerner symmetry holds for the border adjustment and no relative effects occur. In our numerical simulation analyses border tax adjustments accompany carbon emission reduction commitments made either unilaterally , or as part of a global treaty and to be applied against non signatories. We use a four-region (US, EU, China, ROW) general equilibrium structure which captures energy trade and has endogenously determined energy supply so that global emissions can change with policy changes. We calibrate our model to 2006 data and analyze the potential impacts of both EU and US carbon pricing at various levels, either along with or without carbon motivated BTAs policies on welfare, emissions, trade flows and production. Results indicate only small impacts of these measures on global emissions, trade and welfare, but the signs of effects are as expected. BTAs alleviate leakage effects as expected. In trade impacts, compared with no BTAs, BTAs reduce imports of committing countries, and increase imports by other countries. EU and US BTAs against China reduce exports by China. With BTAs, the value of production in the country with carbon reduction measures are introduced increases, and other country’s production decreases compared with the case of no BTAs. With the contraction of world trade flows caused by the financial crisis, carbon motivated BTAs offer a prospect of a compounding effect in a world which is going protectionist and decarbonized at the same time, but the added effects of BTAs seems small.

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Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20093.

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Date of creation: 2009
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Handle: RePEc:uwo:epuwoc:20093
Contact details of provider: Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
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Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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  1. Ben Lockwood & John Whalley, 2008. "Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?," NBER Working Papers 14025, National Bureau of Economic Research, Inc.
  2. Susanne Dröge & Claudia Kemfert, 2005. "Trade Policy to Control Climate Change: Does the Stick Beat the Carrot?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(2), pages 235-248.
  3. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-51, September.
  4. Whalley, John, 1979. "Uniform domestic tax rates, trade distortions and economic integration," Journal of Public Economics, Elsevier, vol. 11(2), pages 213-221, March.
  5. Fischer, Carolyn & Fox, Alan K., 2009. "Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates," Discussion Papers dp-09-02, Resources For the Future.
  6. Mattoo, Aaditya & Subramanian, Arvind & van der Mensbrugghe, Dominique & He, Jianwu, 2009. "Reconciling climate change and trade policy," Policy Research Working Paper Series 5123, The World Bank.
  7. Yuezhou Cai & Raymond Riezman & John Whalley, 2009. "International Trade and the Negotiability of Global Climate Change Agreements," NBER Working Papers 14711, National Bureau of Economic Research, Inc.
  8. 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.
  9. Krauss, Melvyn B & Johnson, Harry G, 1972. "The Theory of Tax Incidence: A Diagrammatic Analysis," Economica, London School of Economics and Political Science, vol. 39(156), pages 357-82, November.
  10. Weber, Christopher L. & Peters, Glen P., 2009. "Climate change policy and international trade: Policy considerations in the US," Energy Policy, Elsevier, vol. 37(2), pages 432-440, February.
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