How large are the impacts of carbon-motivated border tax adjustments on China and how to mitigate them?

Abstract

There have been growing clamours for carbon-motivated border tax adjustments (CBTAs) targeted at countries that do not accept the carbon emission reduction targets. Currently, China is the largest carbon emitter with large annual incremental carbon emissions and might have to face the challenge of CBTA. Therefore, it is a pressing policy challenge for the government to get prepared for mitigating the negative impacts of CBTAs on China. In this article, we compare the impacts of CBTAs across large developing economies and compare the performances of different policy options to mitigate the negative impacts. The main findings are as follows. First, CBTA would affect different economies and different sectors differently. CBTA would result in a shift of production across sectors and relocation of output from the target countries to CBTA users. Second, CBTA would contribute to world's emissions reduction, but less than expected due to carbon leakage. Finally, policy options, which could reduce the present distorting effects, would be preferred to other policy options that would add additional distorting effects to the economy. Looking ahead, the Chinese government should get prepared for mitigating the negative impacts of CBTAs because its economy could be adversely affected.