Border carbon adjustments: Should production or consumption be taxed?

Abstract

Border Carbon Adjustment (BCAs) may play an important role in lowering the economic costs of greenhouse gas mitigation and in overcoming political-economy constraints on use of carbon taxes or equivalent measures. A carbon tax plus a full BCA (CTBA) could deal with the competitiveness challenges arising from carbon taxes by using the WTO's National Treatment principle to apply equal levies on domestic production and on imports, and by symmetrically rebating the carbon tax on exports in the manner of a VAT export rebate. This approach would shift the base for carbon taxation from output to consumption and intermediate input use and potentially lower the cost of achieving reductions in emissions. It would avoid the massive measurement and compliance problems associated with BCAs based on foreign emission intensities. By contrast, proposals for import-only BCAs would distort prices of importables relative to exportables, create competitiveness concerns in export industries, generate economic waste and likely create highly divisive trade conflicts and deterioration in the terms of trade for developing countries.

Border Carbon Adjustments: Should Production or Consumption be Taxed?

“…In the rest of this section, a very simple general equilibrium model is used to examine the importance of these elasticities in a model where market shares can change. This model, presented in the Working Paper version (Martin, 2023), includes two countries (Home and Foreign), two commodities (emission-intensive (E) and a clean numeraire). Initially both allocate 50% of their resources to production of E and spend 50% of their income on that good.…”