Kiel Working Papers, Kiel Institute for World Economics
No 1792:
Fair, Optimal or Detrimental? Environmental vs. Strategic Use of Border Carbon Adjustment
Matthias Weitzel, Michael Hübler and Sonja Peterson
Abstract: We carry out a detailed sensitivity analysis of border
carbon adjustment (rates) by applying a global Computable General
Equilibrium (CGE) GTAP7-based model. We find different incentives for the
regions in the climate coalition to raise carbon-based border tax rates
(BTAX) above the standard rate that mimics an equalisation of carbon prices
across regions. Herein, the strategic use of BTAX (the manipulation of the
terms of trade) is stronger for all coalition regions than the
environmental use (the reduction of carbon emissions abroad). Higher BTAX
can reduce carbon leakage but with a declining marginal effect.
Furthermore, we find different incentives for regions outside the coalition
to oppose high BTAX rates: Russia and the other energy exporters would
oppose it, while the Low-Income Countries would not because of benefits
from the trade diversion effect. Thus, BTAX encourages the former to join
the coalition, while compensating transfers are necessary to encourage the
other (developing) countries including China and India
Keywords: climate policy, border tax adjustment, leakage, trade diversion, coalitions, general equilibrium mod; (follow links to similar papers)
JEL-Codes: F13,; F18,; Q54; (follow links to similar papers)
29 pages, August 2012
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