"The Role of Border Carbon Adjustment in Unilateral Climate Policy: Insights from a Model-Comparison Study"
Belfer Center Programs or Projects: Harvard Project on Climate Agreements
Issues of emission leakage and competitiveness are at the fore of the climate policy debate in all the major economies implementing or proposing to implement substantial emissions cap-and-trade programs. Unilateral climate policy cannot directly impose emissions prices on foreign sources, but it can complement domestic emissions pricing with border carbon adjustment to reduce leakage and increase global cost-effectiveness. While border carbon adjustment has a theoretical efficiency rationale, its practical implementation is subject to serious caveats. This model-comparison study assesses the efficiency and distributional impacts of border carbon adjustment. We find that border carbon adjustment can effectively reduce leakage and ameliorate adverse impacts on energy-intensive and trade-exposed industries of unilaterally abating countries. However, the scope for global cost savings is small. The main effect of border carbon adjustment is to shift the economic burden of emission reduction to non-abating countries through implicit changes in international prices.
The research project on which this Discussion Paper is based was carried out under the auspices of the Energy Modeling Forum (EMF), which is an international expert platform for the discussion of energy and environmental problems. The underlying project is identified as "EMF 29." The main objective of EMF studies is to develop robust insights into energy and environmental policy issues and thereby help to put decision makers on an informed basis. To achieve this objective, EMF studies build on the collective capabilities of experts who apply and compare analytical models to the policy issues in a systematic manner. Researchers involved with this study have jointly investigated a set of pre-defined policy scenarios with harmonized assumptions and a common dataset, as is typically the case with EMF projects.
Christoph Böhringer, University of Oldenburg
Edward J. Balistreri, Colorado School of Mines
Thomas F. Rutherford, University of Wisconsin-Madison
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