THE ROLE OF BORDER CARBON ADJUSTMENTS IN A U.S. CARBON TAX

Warwick McKibbin, Adele C. Morris (), Peter Wilcoxen and Weifeng Liu
Additional contact information
Adele C. Morris: The Brookings Institution, Washington, DC, USA
Weifeng Liu: The Australian National University, Canberra ACT 0200, Australia

Climate Change Economics (CCE), 2018, vol. 09, issue 01, 1-41

Abstract: This paper examines carbon tax design options in the United States using an intertemporal computable general equilibrium model of the world economy called G-Cubed. In this paper, we discuss four policy scenarios that explore two overarching issues: (1) the effects of a carbon tax under alternative assumptions about the use of the resulting revenue, and (2) the effects of a system of import charges on carbon-intensive goods (“border carbon adjustments” or BCAs).Consistent with earlier studies, we find that the carbon tax raises considerable revenue and reduces CO2 emissions significantly relative to baseline, no matter how the revenue is used. Gross annual revenue from the carbon tax with lump sum rebating and no BCA begins at $110 billion in 2020 and rises gradually to $170 billion in 2040. By 2040, annual CO2 emissions fall from 5.5 billion metric tons (BMT) under the baseline to 2.4 BMT, a decline of 3.1 BMT, or 57%. Cumulative emissions over 2020 to 2040 fall by 48 BMT.Also consistent with earlier studies, we find that the carbon tax has very small overall impacts on gross domestic product (GDP), wages, employment, and consumption. Different uses of the revenue from the carbon tax result in slightly different levels and compositions of GDP across consumption, investment and net exports. Overall, using carbon tax revenue to reduce the capital income tax rate results in better macroeconomic outcomes than using the revenue for lump sum transfers.Counter to their purported purpose of protecting U.S. trade strength, for a given revenue policy, BCAs tend to produce lower net exports than the carbon taxes alone. This is generally because the BCAs raise the value of the dollar relative to other currencies, thus lowering exports more than they lower imports. This is consistent with standard results in the international trade literature on the effects of import tariffs and export subsidies on real exchange rates, a result that is often overlooked in the discussion of domestic carbon policy.In a finding new to the literature, our results show that BCAs can have strikingly different effects depending on the use of the revenue. Under a lump sum rebate, BCAs exacerbate the impact of the carbon tax by lowering domestic output further than it would fall under the carbon tax alone. Under a capital tax swap, however, BCAs have a moderating effect: they reduce the impact of the tax on most industries.

Keywords: Carbon tax; climate policy; border carbon adjustment; G-Cubed model (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010007818400110
Access to full text is restricted to subscribers

Related works:
Working Paper: The role of border carbon adjustments in a US carbon tax (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ccexxx:v:09:y:2018:i:01:n:s2010007818400110

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010007818400110

Access Statistics for this article

Climate Change Economics (CCE) is currently edited by Robert Mendelsohn

More articles in Climate Change Economics (CCE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().