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Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade

  • Edward J. BalistreriEmail author
  • Daniel T. Kaffine
  • Hidemichi Yonezawa
Article
  • 42 Downloads

Abstract

A country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives. We argue that the strategic component is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory of border adjustments to neutralize the strategic incentive, and consider the remaining environmental incentive in a simplified structure. The theory supports border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions. The theoretic intuition is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law.

Keywords

Climate policy Border tax adjustments Carbon leakage Trade and carbon taxes 

JEL Classification

F13 F18 Q54 Q56 

Notes

Acknowledgements

The authors thank Harrison Fell, Carolyn Fischer, Alan Fox, Michael Jakob, James R. Markusen, Aaditya Mattoo, Thomas F. Rutherford and participants of seminars at Iowa State University, The World Bank, and the Western Economic Association meetings for helpful comments and discussion. A portion of this research was completed while the authors were supported through a donation to the Colorado School of Mines by the Alcoa Foundation.

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Copyright information

© Springer Nature B.V. 2019

Authors and Affiliations

  1. 1.Department of EconomicsIowa State UniversityAmesUSA
  2. 2.University of ColoradoBoulderUSA
  3. 3.Statistics NorwayOsloNorway

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