Welfare Implications of Border Carbon Adjustments on the Trade of Harvested Wood Products.

Abstract

Border carbon adjustments (BCAs) are designed to regulate carbon emissions and reduce carbon leakage. Thus far, BCAs are mainly applied to imported carbon-intensive products. On the other hand, harvested wood products (HWPs) are the extension of forest carbon stocks, whose changes affect a country's carbon stock level. Nonetheless, the trade of HWPs also raises the problem of carbon leakage when their carbon stocks are exported, which can be partially solved by applying export BCAs. We construct a two-stage game model to analyze the strategy changes of the government and forestry companies under BCAs: the first stage is output competition in a Cournot game similar to the trade of HWPs between New Zealand and China; the second stage is the setting of the tax rate of BCAs by the country. We use the inverse solution method to derive the results of the game. Our results find that the government imposes BCAs on exports of HWPs when the carbon stock value exceeds a threshold. Moreover, the export BCAs on HWPs can effectively reduce the amount of HWPs exported. The results also show that BCAs diminish forestry exporters' revenues and consumer surplus while having no significant detrimental impact on a country's welfare. BCAs help include carbon stock values into HWPs' prices and reduce carbon leakage, which is beneficial for climate change. Thus, exporting countries can maintain their welfare by implementing BCAs, and the forestry companies can respond by improving product quality, enhancing product uniqueness, and reducing production costs.