WHO CARES ABOUT CARBON LEAKAGE? THE ECONOMICS OF BORDER TAX ADJUSTMENTS UNDER INCOMPLETE CLIMATE TREATIES

Leslie Shiell

No 1403E, Working Papers from University of Ottawa, Department of Economics

Abstract: Optimal choices of border tax adjustments (BTA) – tariffs or subsidies on imports and exports – are derived for a coalition of countries working cooperatively to abate greenhouse gas emissions, under an exogenous emissions reduction target. Under a domestic target, the optimal BTA is determined by a terms of trade effect only; therefore there is no justification for a carbon based BTA. It follows that most policy modelling papers have used the wrong baseline (constant domestic target) to test the effectiveness of carbon based BTA’s. Under a global target, the optimal BTA consists of the standard two components from earlier literature: the terms of trade component and an induced foreign emissions component. The common focus on carbon leakage as a major policy concern seems to be misplaced, since leakage represents the optimal rearrangement of production patterns, from the perspective of the coalition, in order to meet the target (domestic or global) in the least-cost manner.

Keywords: international environmental agreements; border tax adjustments; climate change; carbon leakage. (search for similar items in EconPapers)
JEL-codes: Q5 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2014
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