Cross-Border Impacts of Climate Policy Packages in North America

Abstract

We quantify cross-border effects of the recent climate mitigation policies introduced in Canada and the U.S., using the global general equilibrium model IMF-ENV. Notably, with the substantial emission reductions from Canada’s carbon tax-led mitigation policies and the U.S.’ Inflation Reduction Act, these two countries would bridge two-thirds of the gap toward their Nationally Determined Contribution (NDC) goals. While the broadly divergent policies are believed to elicit competitiveness concerns, we find the aggregate cross-border effects within North America to be very limited and restricted to the energy intensive and trade exposed industries. Potential carbon leakages are also found to be negligible. A more meaningful difference triggered by policy heterogeneity is rather domestic, especially with U.S. subsidies increasing energy output while the Canada model with a carbon tax would marginally decrease it. This analysis is complemented by a stylized model illustrating how such divergence can affect the terms of trade, but also how these effects can be countered by exchange rate flexibility, border adjustments or domestic taxation.

Keywords: Climate Policy, Climate Change Policy, Nationally Determined Contributions (NDCs), Mitigation, Climate subsidies, Carbon Tax, Carbon pricing, Spillovers, North America, Global, IMF-ENV model, Computable General Equilibrium (CGE) models, Competitiveness, Greenhouse Gas Emissions (GHG), Revenue Recycling, Inflation Reduction Act (IRA), Power, Electricity

JEL Classification: C60, F18, H20, Q43, Q48