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.
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Authors like to thank Arina Nikandrova for research assistance and participants at a DIW seminar, as well as Gernot Doppelhofer, Denny Ellerman, Christoph Herrmann and Michael Pollitt for valuable comments. Financial support from UK research grants SUPERGEN and TSEC are gratefully acknowledged. The usual caveat applies.
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Ismer, R., Neuhoff, K. Border tax adjustment: a feasible way to support stringent emission trading. Eur J Law Econ 24, 137–164 (2007). https://doi.org/10.1007/s10657-007-9032-8
- Border tax
- Emission trading
- WTO law
- International trade