Reconciling Climate Change and Trade Policy

Abstract

Th ere is growing clamor in industrial countries for additional border taxes on imports from countries with lower carbon prices. We confirm the findings of other research that unilateral emissions cuts by industrial countries will have minimal carbon leakage effects. However, output and exports of energy-intensive manufactures are projected to decline, potentially creating pressure for trade action. A key factor affecting the impact of any border taxes is whether they are based on the carbon content of imports or the carbon content of domestic production. Our quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high income countries but with serious consequences for trading partners. For example, China’s manufacturing exports would decline by one-fifth and those of all low and middle income countries by 8 percent; the corresponding declines in real income would be 3.7 percent and 2.4 percent. Border tax adjustment based on the carbon content in domestic production would broadly address the competitiveness concerns of producers in high income countries and less seriously damage developing country trade.

Keywords: trade, trade policy, environment, climate change

JEL Classification: F13, F18, H23, Q56