, Volume 24, Issue 2, pp 137-164
Date: 25 Sep 2007

Border tax adjustment: a feasible way to support stringent emission trading

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CO2 emission allowances help to internalise effects of fossil fuel consumption on global climate and sea levels. However, consumption, production and investment decisions do not reach the optimal allocation when the scheme is only implemented in some countries. Production with inefficient facilities in non-participating countries may even increase. Border tax adjustment (BTA) for costs incurred from procuring CO2 emission allowances reduces the leakage. We show that BTA can be both feasible and compatible with World Trade Organization (WTO) constraints. Practicable implementability requires a focus on CO2 emissions from certain processed materials and a separate treatment of electric energy input.