Carbon-Motivated Border Tax Adjustment: A Proposal for the EU

Abstract

Abstract:The analysis focuses on carbon-motivated border tax adjustment (CBTA). CBTA are tariffs applied to imports designed to avoid drawbacks of emission reduction policies when only one or few regions (the abating regions) implement them. Through CBTA the abating regions level out different treatment applied to domestic and imported products. In this paper we focus on CBTA metric. Through a multi-region and multi-sector analysis we compute and compare two possible CBTA systems that the European Union could implement to complement a hypothetical carbon tax applied to domestic products. In one system, tariffs are computed based on the emissions generated abroad to produce the goods imported by the European Union. In the second system, tariffs are based on the emissions that the European Union would have generated to produce domestically the same products. Results at country and sector level contribute to better understand the effects of this instrument and to add information to the political debate on it. Moreover, an important contribution of this analysis is that we explore methodological issues that arise from the use of multi-region and multi-sector models to compute different CBTA metrics.JEL Codes: C67, D57, H23, Q56.

Carbon pricing in climate policy: seven reasons, complementary instruments, and political economy considerations

“…This would level the playing field in the sense that comparative disadvantages due to carbon pricing would be reduced or even annulled. Several studies discuss technical aspects of carbon‐motivated border tax adjustments, and on how they can be made consistent with World Trade Organization (WTO) rules . In PE issue 4 in the section on Political Economy Issues , we will discuss the political economy aspects of free riding and possible strategies to overcome it, to achieve international coordination of climate policy, or even an effective climate agreement.…”