Skip to main content
SpringerLink
Log in

Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA) - A New Approach to an Old Carbon Problem

  • Published:
Environmental Modeling & Assessment Aims and scope Submit manuscript

Abstract

The idea of Border Carbon Adjustment (BCA), which makes it possible to transform the standard tax on carbon emissions from production (origin principle) to a tax system imposed at the point of consumption (destination principle), has received a considerable amount of attention from academia and policymakers. In this paper, we go back to the source of environmental destination-based taxation and generalize the results of Markusen (Journal of International Economics, 5, 15–29, 1975) for optimal tax and tariff by extending domestic environmental policy on both goods featuring positive carbon intensities. Following Jakob et al. (Environmental and Resource Economics, 56(1), 47–72, 2013) we remove the strategic term from the optimal tariff and deal with the so-called optimal carbon tariff, targeting primarily environmental externality. Further, we develop a handy approximation for optimal tax and optimal carbon tariff structure in a multiple good setting. Such trade taxation is, however, likely to face further legal obstacles, which may hinder its implementation. This motivates us to adjust the results accordingly and to include refunds for low-carbon investments in a ‘dirty’ country granted proportionally to the difference in carbon intensities between trade partners. This new scheme, known as Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA), mitigates several legal problems and increases political acceptance compared to the ‘standard’ BCA. It can also be seen as advantageous from the economic point of view: it mimics the performance of the optimal carbon tariff while aiming to decrease foreign carbon intensity over the long term.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Subscribe and save

Springer+ Basic
$34.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or eBook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. An equivalent tool is a carbon tax on fossil fuels set proportionally to their carbon content. Please note that each ton of carbon contains 3.67 tons of CO2 [58].

  2. Please note that an equivalent price-like effect can be achieved by the implementation of quantity-based permits with a “safety valve,” which allows the sale of unlimited carbon permits at a pre-defined price [24].

  3. Costs incurred by companies due to CAC regulation relate to the technology upgrades to reach the allowable emissions level, whereas MBIs require companies to pay monetary compensation for each unit of CO2 emitted into the atmosphere [27, 47].

  4. This broad definition encompasses two different types of carbon leakage: “strong” and “weak.” “Strong” CL refers to the emission increases in countries with weak or no environmental policy due to carbon restrictions in other countries. Typical channels of “strong” CL include: the energy market (lower demand for fossil fuels in carbon-restricted areas drives their international price down, which, in turn, encourages higher consumption of fossil fuels in countries with no carbon policy in place), production and investment (domestic products become more expensive due to the internalization of carbon costs and are thus less competitive in comparison to goods imported from countries without carbon regulation. Thus, in the long run, domestic producers shift their production to the countries with no carbon constraints). The scope of “weak” CL is much broader since it does not include any causality condition. Most frequently, “weak” CL is calculated as the net emission transfer between mitigating and non-mitigating areas [34].

  5. Taxation at the border can be executed according to (a) true carbon content, (b) best available technology, (c) dominant production method, or (d) average technology in importing or exporting country [21].

  6. Please note that the idea of BCA has gained strong support among important politicians such as the former President of France, Nikolas Sarkozy, or current US Secretary of State John Kerry[53].

  7. Please note that a CO2 emission tax imposed at the point of production (origin principle) combined with BCA is equivalent to the CO2 emission tax imposed at the point consumption (destination principle) [13], which results directly form the following equality: c o n s u m p t i o n=p r o d u c t i o n−e x p o r t s+i m p o r t s. This form of tax should not be confused with a “consumption tax” on emissions generated during the consumption activity. For a discussion of consumption taxation, please see, e.g., [35].

  8. This can be compared to sectoral carbon tax reliefs that were implemented within the EU ETS in the industrial sectors most prone to the carbon-leakage problem (e.g., the cement industry).

  9. Please note that the derivatives with respect to a particular variable are written with a subscript.

  10. 10 Please notice that \(U_{{C^{A}_{Y}}}/U_{{C^{A}_{X}}}\) is well-defined since \({C^{A}_{Y}}\) and \({C^{A}_{X}}\) can be computed from E x 1,I m 1 and \({Y^{A}_{1}}\).

  11. Please recall that in the optimal carbon tariff by Jakob et al. [25] the term responsible for the change of TOT was deleted.

  12. Please note that environmental Border Adjustments on excise tax, e.g. on particular chemicals (Superfund Amendments and Reauthorization Act) or on Ozone Depleting Chemicals (ODCs) have been successfully implemented for many years [21]. However, it is highly likely that similar regulation of carbon emissions will be much more complicated due to their high economic impact.

  13. In general, subsidies are not allowed under WTO legislation. Primary products are exempted from this based on the assumption of an “equitable share in world trade” [45].

  14. Please note that developing countries with relatively dirtier technology such as China, represented in our model by country B, are generally interested in reducing carbon intensity of their production as long as this does not constitute a significant financial burden that could threaten their economic development. In fact, decreasing carbon intensity and energy intensity are among the main goals of China’s 12 th Five-Year Plan [30].

  15. As the reader may note, the statement and analysis remain true if the environmental factor is added to the welfare function of country B under the assumption that reducing carbon intensities by B lowers its emissions. Following the theory of Environmental Kuznets Curve (EKC) we may expect that the environmental quality will start to influence the welfare function of country B after its income per capita reaches a particular level [16, 38].

  16. Please recall that we defined our trade parameters I m and E x from the point of view of country A. Thus, I m denotes imports of good Y from country B to A.

  17. Due to changes in the production possibility frontier (PPF) resulting from technology upgrade, which would require strong assumptions (which are thus easy to challenge), we do not model this process, but use a static comparative analysis at different points in time keeping PPF unchanged as a useful simplification.

  18. According to the latest findings, local air pollution caused by burning coal poses a very serious health risk to Chinese citizens, see [43].

References

  1. Baranzini, A., Goldemberg, J., & Speck, S. (2000). Future for carbon taxes. Ecological Economics, 32, 95–412.

    Article  Google Scholar 

  2. Barker, T. (1995). Taxing pollution instead of employment: Greenhouse gas abatement through fiscal policy in the UK. Energy and Environment, 6(1), 1–28.

    Google Scholar 

  3. Baumol, W.J., & Oates, W.E. (1988). The theory of environmental policy. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  4. Bovenberg, A.L., & Goulder, L.H. (1996). Optimal environmental taxation in the presence of other taxes: General equilibrium analyses. American Economic Review, 86(4), 985–1000.

    Google Scholar 

  5. Böhringer, C., Balistreri, E.J., & Rutherford, T.F. (2012). The role of border carbon adjustment in unilateral climate policy: Overview of an energy modeling forum study (EMF 29). Energy Economics, 34, 97–110.

    Article  Google Scholar 

  6. Burniaux, J.M., Chateau, J., & Duval, R. (2013). Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis. Applied Economis, 14(16), 2231–2240.

    Article  Google Scholar 

  7. Chao, C.-C., & Yu, E.S.H. (1999). Foreign aid, the environment, and welfare. Journal of Development Economics, 59(2), 553–564.

    Article  Google Scholar 

  8. De Cendra, J. (2006). Can emissions trading schemes be coupled with border tax adjustments? An analysis vis-a-vis WTO law. Review of European Community and International Environmental Law, 15(2), 131–145.

    Article  Google Scholar 

  9. Chandler, W., Schaeffer, R., Dadi, Z., Shukla, P.R., Tudela, F., Davidson, O., & Alpan-Atamer, S. (2002). Climate Change Mitigation in Developing Countries: Brazil, China, India, Mexico, South Africa, and Turkey. Washington DC: Pew Center on Global Climate Change.

    Google Scholar 

  10. Copeland, B.R. (1994). International trade and the environment: Policy reform in a polluted small open economy. Journal of Environmental Economics and Management, 26(1), 44–65.

    Article  Google Scholar 

  11. Copeland, B.R. (1996). Pollution content tariffs, environmental rent shifting, and the control of cross-border pollution. Journal of International Economics, 40(3-4), 459–476.

    Article  Google Scholar 

  12. Cosbey, A., Fischer, C., Droege, S., Reinaud, J., Stephenson, J., Weischer, L., & Wooders, P. (2012). A guide for the concerned: Guidance on the elaboration and implementation of border carbon adjustment. Entwined Policy Report No. 03. http://www.iisd.org/sites/default/files/pdf/2012/bca_guidance.pdf.

  13. Elliott, J., Foster, I., Kortum, S., Munson, M., Pérez Cervantes, F., & Weisbach, D. (2010). Trade and carbon taxes. American Economic Review, 100(2), 465–469.

    Article  Google Scholar 

  14. Flachsland, C., Marschinski, R., & Edenhofer, O. (2009). Global trading versus linking: architectures for international emissions trading. Energy Policy, 37(5), 1637–1647.

    Article  Google Scholar 

  15. Fullerton, D., & Melcalf, G. E. (1998). Environmental taxes and the double-dividend hypothesis: did you really expect something for nothing? Chicago-Kent Law Review, 73(1), 221–256.

    Google Scholar 

  16. Grossman, G.M., & Krueger, A.B. (1991). Environmental impacts of the North American Free Trade Agreement. NBER. Working paper 3914.

  17. Haibara, T. (2009). Environmental funds, public abatement, and welfare. Environmental Resource Economics, 44(2), 167–177.

    Article  Google Scholar 

  18. Hatzipanayotou, P., Lahiri, S., & Michael, M.S. (2002). Can cross-border pollution reduce pollution? The Canadian Journal of Economics, 35(4), 805–818.

    Article  Google Scholar 

  19. Hatzipanayotou, P., Lahiri, S., & Michael, M.S. (2008). Cross-border pollution, terms of trade, and welfare. Environmental Resource Economics, 41(3), 327–345.

    Article  Google Scholar 

  20. Hoel, M. (1996). Should a carbon tax be differentiated across sectors? Journal of Public Economics, 59(1), 17–32.

    Article  Google Scholar 

  21. Holzer, K. (2010). Proposals on carbon-related border adjustments: prospects for WTO compliance. Carbon and Climate Law, 4(1), 51–64.

    Google Scholar 

  22. Ismer, R., & Neuhoff, K. (2007). Border tax adjustment: a feasible way to support stringent emission trading. European Journal of Law and Economics, 24(2), 137–164.

    Article  Google Scholar 

  23. Jaffe, A.B., Peterson, S.R., Portney, P.R., & Stavins, R.N. (1995). Environmental regulation and the competitiveness of US manufacturing: what does the evidence tell us? Journal of Economic Literature, 33(1), 132–163.

    Google Scholar 

  24. Jackoby, H. D., & Ellerman, D. (2004). The safety valve and climate policy. Energy Policy, 32(4), 481–491.

    Article  Google Scholar 

  25. Jakob, M., Marschinski, R., & Huebler, M. (2013). Between a rock and a hard place: a trade-theory analysis of leakage under production- and consumption-based policies. Environmental and Resource Economics, 56(1), 47–72.

    Article  Google Scholar 

  26. Keen, M., & Kotsogiannis, C. (2014). Coordinating climate and trade policies: Pareto efficiency and the role of border tax adjustments. Journal of International Economics, 94, 119–128.

    Article  Google Scholar 

  27. Keohane, N., Revesz, R., & Stavins, R. (1998). The choice of regulatory instruments in environmental policy. Harvard Environmental Law Review, 22(2), 313–367.

    Google Scholar 

  28. Feldstein, M., & Krugman, P. (1990). Ch. 7 international trade effects of value-added taxation. In Razin, A., & Slemrod, J. (Eds.) Taxation in the Global Economy: University of Chicago Press.

  29. Kuik, O., & Hofkes, M. (2010). Border adjustment for European emissions trading: competitiveness and carbon leakage. Energy Policy, 38, 1741–1748.

    Article  Google Scholar 

  30. Lee, K.M.A., & Chua, H. (2013). China’s 12 th five-year plan: challenges and opportunities for sustainable energy technologies. International Journal of Low-Carbon Technologies. doi:10.1093/ijlct/ctt024.

    Google Scholar 

  31. Lockwood, B., & Whalley, J. (2010). Carbon motivated border tax adjustments: old wine in green bottles? The World Economy, 33(6), 810–819.

    Article  Google Scholar 

  32. Ludema, R.D., & Wooton, I. (1994). Cross-border externalities and trade liberalization: the strategic control of pollution. Canadian Journal of Economics, 27(4), 950–966.

    Article  Google Scholar 

  33. Markusen, J. (1975). International extrernalities and optimal trade structures. Journal of International Economics, 5, 15–29.

    Article  Google Scholar 

  34. Michalek, G., & Schwarze, R. (2014). Carbon leakage: pollution, trade or politics? Environment, Development and Sustainability. doi:10.1007/s10668-014-9616-8.

    Google Scholar 

  35. Michael, S.M., & Hatzipanayotou, P. (2013). Cooperative and Non-Cooperative Equilibrium Consumption Taxes in the Presence of Cross-Border Pollution. CESifo Working Paper Series 4501.

  36. Neary, J. (2006). International trade and the environment: theoretical and policy linkages. Environmental and Resource Economics, 33(1), 95–118.

    Article  Google Scholar 

  37. Nimubona, A.-D., & Rus, H.A. (2014). Green technology transfers and border tax adjustments. Environmental Resource Economics. doi:10.1007/s10640-014-9821-9.

    Google Scholar 

  38. Panayoutou, T. (1997). Demystifying the environmental Kuznets curve: turning a black box into a policy tool. Environment and Development Economics, 2(04), 465–484.

    Article  Google Scholar 

  39. Pauwelyn, J. (2007). U.S. federal climate policy and competitiveness concerns: the limits and options of international trade law. NI, WP07−02. Durham: Nicholas Institute for Environmental Policy Solutions, Duke University.

    Google Scholar 

  40. Peters, G.P., Minx, J.C., Weber, C.L., & Edenhofer, O. (2011). Growth in emission transfers via international trade from 1990-2008. PNAS, 109, 8903–8908.

    Article  Google Scholar 

  41. Pizer, W. (2001). Choosing price or quantity controls for greenhouse gases. In Toman, M.A. (Ed.) Climate Change Economics and Policy. Washington, DC: Resources for the Future.

  42. Porter, M.E., & van der Line, C. (1995). Toward a new conception of the environment competitiveness relationship. Journal of Economic Perspectives, 9(4), 97–118.

    Article  Google Scholar 

  43. Rohde, R.A., & Muller, R.A. (2015). Air pollution in China: Mapping of concentrations and sources. PLoS ONE, 10(8), e0135749. doi:10.1371/journal.pone.0135749.

    Article  Google Scholar 

  44. Rong, F. (2010). Understanding developing country stances on post-2012 climate change negotiations: comparative analysis of Brazil, China, India, Mexico,and South Africa. Energy Policy, 38(8), 4582–4591.

    Article  Google Scholar 

  45. Perace, R., & Sharma, R. (2000). Multirateral Trade Negotiations on Agriculture, Ch. II Afreement on Agriculture, Module 3 Export Subsidies, FAO, Rome.

  46. Springmann, M. (2013). Carbon tariffs for financing clean development. Climate Policy, 13, 20–42.

    Article  Google Scholar 

  47. Stavins, R.N. (1997). Policy instruments for climate change: how can national governments address a global problem? The University of Chicago Legal Forum, 1997, 293–329.

    Google Scholar 

  48. Le Quere, C., & et al. (2014). Global carbon budget 2014. Earth System Science Data Discussions. doi:10.5194/essdd-7-521-2014.

    Google Scholar 

  49. Steiniger, K., Lininger, C., Droege, S., Roser, D., Tomlinson, L., & Meyer, L. (2014). Justice and cost effectiveness of consumption-based versus production-based approaches in the case of unilateral climate policies. Global Environmental Change, 24, 75–87.

    Article  Google Scholar 

  50. Tsakiris, N., Michael, M.S., & Hatzipanayotou, P. (2011). Cross-Border Pollution and Integrated Reforms of Trade and Environmental Tax Policies in Large Economies. Working paper.

  51. Turunen-Red, A.H., & Woodland, A.D. (2004). Multilateral reforms of trade and environmental policy. Review of International Economics, 12, 321–336.

    Article  Google Scholar 

  52. Vlasis, N. (2014). Tariff reforms in the presence of pollution. http://www.bath.ac.uk/economics/documents/external_seminar_papers/Tariff_reforms_in_the_presence_of_pollution_N_Vlassis_110315.pdf.

  53. Winchester, N., Paltsev, S., & Reilly, J. (2010). Will Border Carbon Adjustments Work? MIT Joint Program on the Science and Policy of Global Change, Report No. 184.

  54. Weitzel, M., Huebler, M., & Peterson, S. (2012). Fair, optimal or detrimental? Environmental vs. strategic use of border carbon adjustment. Energy Economics, 34, 198–207.

    Article  Google Scholar 

  55. Weitzman, M.L. (1974). Prices vs. quantities. The Review of Economic Studies, 41(4), 477–491.

    Article  Google Scholar 

  56. World Trade Organisation, Committee on Trade and Environment (2012). GATT/WTO Dispute settlement practice relating to GATT Article XX, paragrpahs (b), (d) and (g), WT/CTE/W/203. http://www.oas.org/dsd/Tool-kit/Documentos/MOduleII/GATT%20WTO%20Dispute%20Settlement%20Practice.pdf.

  57. Yonezawa, H., Balistreri, E., & Kanne, D. (2012). The suboptimal nature of applying Pigouvian rates as border adjustments. Working Paper Series of Colorado School of Mines, Division of Economics and Business. http://econbus.mines.edu/working-papers/wp201202.pdf.

  58. Zhang, Z.X., & Baranzini, A. (2004). What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income. Energy Policy, 32(4), 507–518.

    Article  CAS  Google Scholar 

Download references

Acknowledgments

I would like to thank Reimund Schwarze for awakening my interest in the topic and Robert Marschinski, Friedel Bolle for insightful information and comments. Further, I am very grateful to anonymous reviewers whose remarks helped me to improve the paper. Last but not least, I would like to thank the Energy and Resources Group at UC Berkeley - and David Anthoff in particular - for their kind hospitality and for creating a great atmosphere to work in. The study received support from the Viadrina International Program for Graduates (VIP), which is gratefully acknowledged. The VIP is promoted by the German Academic Exchange Service (DAAD) and funded by the German Federal Ministry of Education and Research.

Author information

Authors and Affiliations

  1. European University Viadrina, Große Scharrnstr. 59, 15230, Frankfurt, Germany

    Gabriela Michalek

  2. University of California, Berkeley, ERG. 310 Barrows Hall, Berkeley, CA, 94720, USA

    Gabriela Michalek

Authors
  1. Gabriela Michalek
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Gabriela Michalek.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Michalek, G. Progressive Optimal Technology-based Border Carbon Adjustment (POT BCA) - A New Approach to an Old Carbon Problem. Environ Model Assess 21, 323–337 (2016). https://doi.org/10.1007/s10666-015-9484-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10666-015-9484-0

Keywords

Search

Navigation