Carbon control policies, competitiveness, and border tax adjustments

Abstract

Several propositions have recently been made to use border tax adjustments (BTAs) to address the loss of competitiveness induced by unilateral stringent domestic pollution control policies. This paper explores in a general equilibrium framework the sectoral and welfare implications of a unilateral domestic GHG control policy combined with a BTA scheme. Using the Canadian economy as an illustration, we assess the extent to which BTAs achieve their objectives and analyze the impacts of different methods of recycling the BTA proceeds to support domestic industries. Our simulation results suggest that imposing BTAs on the imports of non-fossil and energy-intensive products reduces or removes completely the negative competitiveness impacts that domestic industries suffer from. The use of the proceeds of the BTAs to support domestic energy-intensive industries improves their competitiveness and, more importantly, in some cases, overprotects them, as it allows them to even increase their output in comparison to the benchmark without emissions control. Our results also shed light on the existence of heterogeneity in the composition of energy-intensive industries as far as the recycling method of the BTA proceeds is concerned. Energy-intensive industries that are more oriented toward the domestic market are better off with the recycling of the BTA proceeds towards gross output than towards exports alone. Finally, abstracting from the environmental benefits of reduced emissions, we find that a BTA entails a higher welfare cost to households.