Border Carbon Adjustments

35 Pages Posted: 23 Jan 2013

See all articles by Mark Sanctuary

Mark Sanctuary

The Royal Swedish Academy of Sciences - Beijer International Institute of Ecological Economics; IVL Swedish Environmental Research Institute; Stockholm University - Department of Economics

Date Written: January 23, 2013

Abstract

Views on the use of Border Carbon Adjustment (BCA) diverge but the strategic implications figure prominently in the debate. In this paper I examine how BCA policy design affects government incentives to regulate emissions and trade in a strategic setting. In particular, the paper examines if, and how, the importer can use BCA to induce a tightening of unilateral climate policy at home and abroad. Using a standard one-sector, two-country partial equilibrium model with climate damages from emissions, I examine BCA in a game where the emission taxes of the importer and exporter are chosen endogenously. I show that the impact of a BCA is not necessarily the adoption of more stringent climate policy. The outcome is determined by the extent trade is restricted by the BCA, the level at which trade partners set their respective emission taxes, and the effectiveness of the BCA in addressing both foreign and home's leakage. The paper also identifies the difference between a BCA and a carbon tariff in terms of their ability to leverage climate policy in a strategic setting.

Keywords: Border carbon adjustment, strategic trade and climate policy

JEL Classification: F02, F13, F15, H23

Suggested Citation

Sanctuary, Mark, Border Carbon Adjustments (January 23, 2013). Available at SSRN: https://ssrn.com/abstract=2205549 or http://dx.doi.org/10.2139/ssrn.2205549

Mark Sanctuary (Contact Author)

The Royal Swedish Academy of Sciences - Beijer International Institute of Ecological Economics ( email )

The Royal Swedish Academy of Sciences
P.O. Box 50005
S-104 05 Stockholm, SE-104 05
United States

IVL Swedish Environmental Research Institute ( email )

Valhallavägen 81
Stockholm, 114 27
Sweden

HOME PAGE: http://www.ivl.se

Stockholm University - Department of Economics ( email )

Universitetsvägen 10 A
House A, floor 4 and 7
Frescati, Stockholm
Sweden

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