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
Date Written: October 2015
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: Suggested Citation