The Economic and Environmental Effects of Border Tax Adjustments for Climate Policy

(DRAFT 1) ABSTRACT: For the foreseeable future, climate change policy will be considerably more stringent in some countries than in others. Indeed, the United Nations Framework Convention on Climate Change explicitly states that developed countries must take meaningful action before any obligations are to be placed on developing countries. However, differences in climate policy will lead to differences in energy costs, and to concerns about competitive advantage. In high-cost countries, there will be political pressure to impose border adjustments, or “green tariffs”, on imports from countries with little or no climate policy and low energy costs. The adjustments would be based on the carbon emissions associated with production of each imported product, and would be intended to match the cost increase that would have occurred had the exporting country adopted a climate policy similar to that of the importing country. In this paper, we estimate how large such tariffs would be in practice, and then examine their economic and environmental effects using G-Cubed, a detailed multi-sector, multi-country model of the world economy. We find that the tariffs would be small on most traded goods, would reduce leakage of emissions reduction very modestly, and would do little to protect import-competing industries. We conclude that the benefits produced by border adjustments would be too small to justify their administrative complexity or their deleterious effects on international trade.