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EMF 29: The Role of Border Carbon Adjustment in Unilateral Climate Policy

Completed

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Abstract: 
The EMF 29 study investigates the economic impacts of border carbon adjustment in unilateral climate policy. Effective and efficient climate protection ultimately requires cooperative action across all major greenhouse gas emitting countries. Yet, stringent emission constraints may not be assumed by important emerging economies such as China or India unless industrialized countries which have largely caused the climate problem so far and range high both in per-capita income as well as in per-capita emissions take a lead with substantial reductions of their own emissions.

Unilateral climate policy design faces specific challenges due to the global nature of the greenhouse gas externality and international market responses. Emission constraints affect comparative advantage, in particular for trade-exposed industries where emission-intensive inputs represent a significant share of direct and indirect costs. As a consequence of unilateral regulation, production of emission-intensive and trade-exposed goods may relocate to countries without or with laxer emission controls. This induces counterproductive emission leakage: Part of the emission reduction through unilateral regulation will be offset through emission increases in non-regulating regions. Concerns about leakage and excessive structural change at the disadvantage of domestic emission-intensive and trade-exposed industries are central to the policy debate on unilateral emission abatement. In response to such concerns, border carbon adjustment (BCA) appears as an attractive policy option for many countries that intend to move forward with unilateral climate policies. At first glance, the appeal of BCA is intuitive: Tariffs on embodied carbon of goods imported from unregulated trading partners, joint with rebates of emission payments on exports from domestic sources, level the playing field in international trade while internalizing the cost of climate damage into domestic prices of goods and services. At second glance, BCA could be perceived as a coercive instrument to pressure other countries to adopt policies for emission reduction. BCA may effectively work as back-door trade policy, where industrialized countries exploit international market power thereby shifting (part of) the abatement burden to trading partners in the developing world. The leverage motivation and regressive impacts of BCA conflict with the UNFCCC principle of common but differentiated responsibility and respective capabilities, which explicitly recognizes that developing countries should not be expected to implement the same kinds of policies as developed countries. Against this background, the EMF 29 study was designed to investigate the efficiency and distributional impacts of BCA. This study builds on model-based quantitative analysis of 12 expert groups that jointly investigate a set of pre-defined policy scenarios with harmonized assumptions and common datasets. Furthermore, each expert group complements the joint assessment with additional analysis on a specific policy-relevant topic in the context of unilateral climate policy design.

The results of EMF 29 was published as a Special Issue of Energy Economics and is available here: EMF 29

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