Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis

Abstract

Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format ECO/WKP(2010)50 Unclassified English-Or. English ECO/WKP(2010)50 2 ABSTRACT/RÉSUMÉ Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis Concern that unilateral greenhouse gas emission reductions could foster carbon leakage and undermine the international competitiveness of domestic industry has led to growing calls for carbon-based border-tax adjustments (BTAs). This paper uses a global general equilibrium model to assess the economic effects of BTAs and comes to three main conclusions. First, BTAs can reduce carbon leakage if the coalition of countries taking action to reduce emissions is small, because in this case leakage (while typically small) mainly occurs through international trade competitiveness losses rather than through declines in world fossil fuel prices that trigger rising carbon intensities outside the region taking action. Second, the welfare impacts of BTAs are small, and typically slightly negative at the world level. Third, and perhaps more strikingly, BTAs do not necessarily curb the output losses incurred by the domestic energy intensive-industries (EIIs) they are intended to protect in the first place. This is in part because taken as a whole, EIIs in industrialised countries make important use of carbon-intensive intermediate inputs produced by EIIs in other geographical areas. Another, deeper explanation is that EIIs are ultimately more adversely affected by carbon pricing itself, and the associated contraction in market size, than by any international competitiveness losses. These findings are shown to be robust to key model parameters, country coverage and design features of BTAs.

An Overview of the OECD ENV-Linkages Model

“…Dellink et al (2013) find that indirect linking of carbon markets through a common offset system can be at least as powerful as direct linking in terms of reducing mitigation costs. The model was also used to investigate border carbon adjustments (BCAs) as possible response policy to address impacts of climate policies on competitiveness and carbon leakage (Burniaux et al, 2013). The BCAs were modelled carbon-based import tariffs levied on non-acting countries and carbon-based export subsidies in support of domestic production in acting countries.…”

Impacts of Border Carbon Adjustments on China's Sectoral Emissions: Simulations with a Dynamic Computable General Equilibrium Model

“…Against this background, this study aims to analyze the impacts of the BTAs implemented by US and EU on China's sectoral carbon emissions by using a recursive dynamic computable general equilibrium (CGE) model. The CGE model may be the most popular model tool for assessment of energy and environment policies globally (Zhang, 1998a;Shoven and Whalley, 1972;McFarland et al, 2004;Ross et al, 2009;Xu and Masui, 2009;Hübler, 2011;Rivers, 2010;Böhringer et al, 2010;Kuik and Hofkes, 2010;Burniaux et al, 2011). Compared with other policy assessment methods, such as partial equilibrium analysis and input-output (IO) analysis, the CGE method is able to reveal the comprehensive relationships in the whole economy and conduct policy simulations under the general equilibrium assumption.…”

Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets

“…The environmental rationale for BCAs is that they would reduce carbon leakage and provide incentives for nonacting countries to strengthen their mitigation policies. Even when carbon leakage is limited, BCAs can potentially contribute to reducing competitiveness and output losses in domestic EIT sectors through levelling domestic and imported prices (Burniaux et al, 2013). However, there are important politicaleconomy concerns related to BCAs, including potential incompatibility with the World Trade Organisation (WTO) rules and the risk of retaliation by other countries which may result in "trade wars".…”