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Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade

Edward Balistreri (), Daniel Kaffine and Hidemichi Yonezawa

Environmental & Resource Economics, 2019, vol. 74, issue 3, No 6, 1037-1075

Abstract: Abstract A country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives. We argue that the strategic component is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory of border adjustments to neutralize the strategic incentive, and consider the remaining environmental incentive in a simplified structure. The theory supports border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions. The theoretic intuition is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law.

Keywords: Climate policy; Border tax adjustments; Carbon leakage; Trade and carbon taxes (search for similar items in EconPapers)
JEL-codes: F13 F18 Q54 Q56 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade (2019) Downloads
Working Paper: Optimal environmental border adjustments under the General Agreement on Tariffs and Trade (2016) Downloads
Working Paper: Optimal environmental border adjustments under the General Agreement on Tariffs and Trade (2014) Downloads
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DOI: 10.1007/s10640-019-00359-2

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