Climate Policy and Border Measures: The Case of the U.S. Aluminum Industry

Abstract

This article analyzes the impact of border measures for climate policy on carbon leakage and the competitiveness of U.S. aluminum producers. An appropriate border measure is shown to depend on competition in aluminum production, as well as the basis for assessing trade neutrality of a border measure. If neutrality is based on market volume, carbon leakage is prevented, but competitiveness cannot be maintained. If neutrality is based on market share, competitiveness can be maintained and there is negative carbon leakage. In either case, users of aluminum incur deadweight losses from the combination of climate policy and border measures. The key policy implication of the analysis is that appropriately designed border measures for climate policy may break the link between competitiveness and carbon leakage, but their design is important in ensuring that they are not protectionist.