Political influence on international climate agreements with border carbon adjustment

Achim Hagen and Mark Schopf

Journal of Environmental Economics and Management, 2024, vol. 125, issue C

Abstract: We study the influence of industrial lobbying on national climate policies and the formation of an international environmental agreement if the coalition countries use border carbon adjustments to protect domestic producers. We find that the effects of this political influence crucially depend on the distribution of carbon tax revenues. If these are transferred to the households, lobbying distorts carbon taxes downwards to reduce the tax burden and does not affect coalition sizes. This leads to higher emissions and lower welfare. By contrast, if tax revenues are given back to the firms, lobbies in the outsider countries favor carbon taxes, whereas lobbies in the coalition countries favor carbon subsidies to raise the international commodity price. This reduces the tax difference and the welfare difference between the countries, which reduces the free-rider incentives. Then, lobbying stabilizes the grand coalition and reduces global emissions compared to a “perfect” world without lobbying if the political influence is sufficiently strong.

Keywords: Carbon leakage; Climate change; Environmental policy; Lobbying (search for similar items in EconPapers)
JEL-codes: D72 F13 F18 H23 Q54 Q56 Q58 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:125:y:2024:i:c:s0095069624000536

DOI: 10.1016/j.jeem.2024.102979

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