The Impacts of Carbon Tariffs on International Trade Flows and Carbon Emissions: An Analysis Integrating Trade Elasticities with an Application to Us-China Trade

Abstract

Carbon tariff has been widely studied as a prominent climate policy in terms of its influences on the economy and the environment. However, previous studies of its effectiveness did not incorporate into the analysis of some key factors, including, notably, trade elasticities. This paper aims at reducing the gap between trade economics and environment studies by integrating trade elasticities into the analysis of carbon tariff’s impacts on trade flows and carbon emissions embodied in exports. We start by adopting the gravity trade model and constructing a panel data set of 63 countries from 2005 to 2015 to calculate the trade elasticities across 13 industries. With a simple model that translates carbon tariff into tariff, we evaluate the cross-country and cross-industry impacts of carbon tariff. A model to forecast the effect of carbon tariff on China-US trade under different scenarios is also provided. We discover that industries' trade elasticities and carbon intensities play an essential role in determining carbon tariff's impacts. Furthermore, our estimations show the threshold carbon tariffs for the 13 industries with an average of $42/tCO2. We found out that if America stopped importing from China by replacing all Chinese exports with U.S. domestic productions, it would emit 88.8% fewer carbon emissions than China does, which would contribute to a 0.65% decrease in world carbon emissions. In the scenarios of America replacing all Chinese exports with Canadian, Japanese, or Mexican exports, the results are similar. This paper suggests that trade elasticities should be considered when designing carbon tariffs.

Keywords: Carbon tariffs, trade elasticities, gravity model, trade policy, climate policy, US-China trade