Political Influence on International Climate Agreements with Border Carbon Adjustment

Abstract

We study the influence of industrial lobbying on national climate policies and the formation of an international environmental agreement if the coalition countries use border carbon adjustments to protect domestic producers. We find that lobbies in the outsider countries favor carbon taxes, whereas lobbies in the coalition countries favor carbon subsidies. This reduces the tax difference and the welfare difference between the countries, which reduces the free-rider incentives. In our parametric model, this stabilizes the grand coalition and reduces global emissions compared to a ``perfect'' world without lobbying if the political influence is sufficiently strong.

Keywords: carbon leakage, climate change, Environmental policy, lobbying