Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade

CER-ETH - Center of Economic Research at ETH Zurich, Economics Working Paper Series 16/235

42 Pages Posted: 17 Mar 2016

See all articles by Edward J. Balistreri

Edward J. Balistreri

Iowa State University

Daniel Kaffine

Colorado School of Mines - Division of Economics and Business

Hidemichi Yonezawa

Statistics Norway

Date Written: October 2015

Abstract

A country’s optimal environmental border policy includes a strategic component that is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory to include GATT compliance. Theory supports optimal border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments encourage consumption of emissions intensive goods in unregulated regions. The theory is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law.

Keywords: climate policy, border tax adjustments, carbon leakage, trade and carbon taxes

JEL Classification: F13, F18, Q54, Q56

Suggested Citation

Balistreri, Edward J. and Kaffine, Daniel and Yonezawa, Hidemichi, Optimal Environmental Border Adjustments Under the General Agreement on Tariffs and Trade (October 2015). CER-ETH - Center of Economic Research at ETH Zurich, Economics Working Paper Series 16/235, Available at SSRN: https://ssrn.com/abstract=2748446 or http://dx.doi.org/10.2139/ssrn.2748446

Edward J. Balistreri (Contact Author)

Iowa State University ( email )

260 Heady Hall
Ames, IA 50011
United States
3032531674 (Phone)

Daniel Kaffine

Colorado School of Mines - Division of Economics and Business ( email )

1500 Illinois Street
Golden, CO 80401
United States

Hidemichi Yonezawa

Statistics Norway ( email )

N-0033 Oslo
Norway

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