The Opportunities and Limitations of Neutral Carbon Tariffs

19.2 American Law and Economics Review 423 (2017)

Case Legal Studies Research Paper No. 2017-20

39 Pages Posted: 6 Nov 2017

See all articles by Juscelino F. Colares

Juscelino F. Colares

Case Western Reserve University School of Law

Ashwin Rode

University of Chicago

Date Written: October 25, 2017

Abstract

Because carbon taxes can lead to loss of competitiveness, applying tariffs on imports from non-carbon-restricting countries helps address the cost disadvantage faced by producers in carbon-restricting countries. Such tariffs, known as border carbon adjustments ("BCAs"), can also help reduce possible carbon "leakage," or the growth in foreign emissions due to increased production of carbon-intensive goods in non-carbon-restricting countries. We demonstrate that BCAs that do not exceed the burdens imposed by carbon taxation on domestic like products could be consistent with World Trade Organization ("WTO") rules. However, "neutral" (i.e., nondiscriminatory) BCAs might still be inefficiently high from a global welfare perspective. This stems from the misaligned focus of BCAs on imports rather than production — the real cause of emissions. The discrepancy between neutrality and efficiency enables carbon-restricted industries to seek inefficiently high BCAs. Recognition of this discrepancy strengthens the case for multilateral alternatives that curb global carbon emissions.

Keywords: Border Carbon Adjustments, Carbon Tariffs, National Treatment, Neutrality, Efficiency, Rent-Seeking, Externalities, Trade and Environment

JEL Classification: F13, F18, H23

Suggested Citation

Colares, Juscelino F. and Rode, Ashwin, The Opportunities and Limitations of Neutral Carbon Tariffs (October 25, 2017). 19.2 American Law and Economics Review 423 (2017), Case Legal Studies Research Paper No. 2017-20, Available at SSRN: https://ssrn.com/abstract=3059218

Juscelino F. Colares (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States

Ashwin Rode

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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