A CGE Analysis of Border Adjustments Under the Cap-and-Trade System: A Case Study of the Japanese Economy

Abstract

Using a multi-region and multi-sector CGE model, this paper evaluates the impact of border adjustment policies of carbon regulations on the Japanese economy. We consider the following six scenarios: 1) no border adjustment, 2) carbon tariffs on imports based on the carbon content in foreign exporters’ production, 3) carbon tariffs on imports based on the carbon content in domestic production (BID), 4) carbon tariffs on imports and rebates on exports based on the carbon content in domestic production (BIED), 5) BID applied only to the EITE (energy-intensive trade-exposed) sectors, and 6) BIED applied only to the EITE sectors. In particular, we examine the impact of the border adjustment policies on the welfare of the Japanese economy, carbon leakage, and the competitiveness of the Japanese EITE sectors.Our analysis shows that no single border adjustment policy is superior to the other policies in terms of simultaneously solving all three issues: welfare impacts, carbon leakage, and the loss of competitiveness in the EITE sectors. In addition, we show that export border adjustment often plays a crucial role in Japan. This insight is interesting because the policy debate on border adjustment is often biased toward import border adjustment. Our analysis also reveals that border adjustment in Japan significantly affects carbon leakage to China and the competitiveness of the iron and steel sector. Finally, we show that border adjustments with and without consideration to indirect emissions have similar impacts, which indicates that the information regarding direct emissions is enough to implement border adjustment in Japan.