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Border Adjustments Supplementing Nationally Determined Carbon Pricing

  • Melanie Hecht
  • Wolfgang Peters
Article

Abstract

As agreed on in the Paris Agreement, each country determines its own contribution to combat climate change on a voluntary basis. There is no mechanism to force a country to comply with its own nationally determined contributions. This bottom-up approach builds on unilateral actions and yields a kind of carbon pricing, which is not necessarily identical across countries. As a consequence, these nationally determined climate policies have drawbacks in terms of carbon leakage and loss of competitiveness for firms producing in high carbon price countries. To reduce these negative effects, border adjustments (BAs) may be appropriate subsequent to more stringent environmental regulation. We model a three-stage game involving carbon price competition in the first stage, the introduction of BAs in the second stage and oligopolistic competition between firms in the third stage. Strategic trade theory suggests that the qualitative results about the optimal BA policy may vary with the underlying type of competition, namely Bertrand and Cournot competition. However, our results are similar for both types of competition. We conclude that BAs are suitable for supporting a more stringent environmental policy. Moreover, we find that anticipation of the implementation of BAs in the second stage yields higher average carbon prices in the first stage since high carbon price countries increase their carbon prices whereas the other countries partially offset.

Keywords

Unilateral climate policy Carbon pricing Environmental tax competition Border adjustment International trade Oligopolistic competition 

JEL Classification

C72 H41 F12 

Notes

Acknowledgements

We benefited from discussions held at the Public Economics Workshop in the WZB Berlin and at conferences in Dresden and Hamburg as well as from valuable comments by Daniel Becker, Michael Rauscher, Hendrik Ritter and Anna-Katharina Topp. We were able to further improve the paper following presentations at EARE 2017 in Athens and PET 2017 in Paris. In particular, we would like to thank Rabah Amir for taking the time to discuss the content of the paper. We would like to thank the editor of the Journal of Environmental and Resource Economics, Carolyn Fischer, and two anonymous referees for their valuable input. We also gratefully acknowledge the financial support given by the German Federal Ministry of Education and Research, FKZ 01LA1139A.

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Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  1. 1.European University ViadrinaFrankfurt (Oder)Germany

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