Carbon pricing, border adjustment and climate clubs: Options for international cooperation

Anne Ernst, Natascha Hinterlang, Alexander Mahle and Nikolai Stähler

Journal of International Economics, 2023, vol. 144, issue C

Abstract: In a dynamic, three-region environmental multi-sector general equilibrium model, we find that carbon pricing generates a long-lasting downturn as production costs rise. Dirty production is shifted towards countries with laxer climate policies, known as carbon leakage. A border adjustment tax mitigates but does not prevent carbon leakage. Its impact on emissions is limited, and it mainly “protects” dirty domestic production sectors with tradeable goods (in relative terms). Benefits from lower emissions damage materialize only in the medium to long run. From the perspective of a region that introduces carbon pricing, the downturn is smaller and long-run benefits are larger if more regions participate. However, for non-participating regions, there is no incremental incentive to participate as they forego trade spillovers and face higher production costs along the transition. Because of the costly transition, average world welfare may fall as a result of global carbon pricing unless “the rich” assist “the poor”.

Keywords: Carbon pricing; Border adjustment; Climate clubs; International dynamic general equilibrium model; Sectoral heterogeneity; Input-output matrix (search for similar items in EconPapers)
JEL-codes: E32 E62 F42 H32 Q58 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:144:y:2023:i:c:s0022199623000582

DOI: 10.1016/j.jinteco.2023.103772

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