Border adjustments under unilateral carbon pricing: the case of Australian carbon tax

In the absence of a global agreement to reduce emissions, Australia has adopted a carbon tax unilaterally to curb its own emissions. During the debate prior to passing the carbon tax legislation, there were concerns about the challenge that Australia’s emissions intensive and trade exposed (EITE) industries may face in terms of decreasing international competitiveness due to the unilateral nature of the tax and hence the potential for carbon leakage. In order to address these concerns, this paper explores possible border adjustment measures (BAMs) to complement the domestic carbon regulation in Australia using the multi-sector computable general equilibrium (CGE) approach. We consider four border adjustments: border adjustments on imports based on domestic emissions; border adjustments on exports via a rebate for exports; a domestic production rebate; and full border adjustment on both exports and imports. We compare the numerical simulation results of these scenarios with a no border adjustments scenario from the standpoint of welfare, international competitiveness, and carbon leakage. The key finding is that BAMs have a very small impact on the overall economy and on EITE sectors. In other words, the different BAMs are unlikely to change the outcomes of carbon pricing policy in Australia in any significant way. This finding is consistent with studies for EU, US, Canada and other countries. We conclude with the consideration of whether the border adjustments are warranted in the Australian case. JEL Classification: Q56, F18