Potential economic impacts of carbon tariffs on target countries: a systematic review

Abstract

ABSTRACT Carbon tariffs have been proposed to mitigate carbon leakage and industrial competitiveness losses due to uneven abatement efforts across countries. However, this raises concerns about the possible economic impacts on target countries and the associated issue of fair share of CO2 abatement burdens. This study presents a systematic review of potential economic impacts of carbon tariffs on target countries, based on 109 peer-reviewed articles published from 2010 to May 2024. On balance, studies consistently report that carbon tariffs would adversely affect the economy of target countries. However, it is difficult to generalize about the extent of such impacts in a quantitative way due to the differences in scenario setting in different studies, which varies by implementing countries, target countries, and specific carbon tariff design like tariff rates and the scope of emissions, as well as by indicators used to measure economic impacts. Studies discuss measures that implementing or target countries can take to mitigate such economic impacts, like recycling revenues to target countries, practicing trade retaliation, and making ambitious CO2 abatement policies. However, studies lack solid findings on the effectiveness of these measures. The associated issue of fair share of CO2 abatement burdens was not discussed much in these studies plausibly due to its normative nature. Future research should be directed to systematically quantify potential economic impacts of carbon tariffs by using scenarios that reflect the dynamic global economic and trade changes, evaluate the effectiveness of various measures for alleviating the economic impacts, and explore equity issues associated with carbon tariffs using both normative and positive approaches.