Carbon Motivated Border Tax Adjustments Research Articles

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

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.

Unilateral climate policy design: Efficiency and equity implications of alternative instruments to reduce carbon leakage

Global cost-effectiveness of unilateral emission abatement can be seriously hampered by carbon leakage. We assess three widely discussed proposals for leakage reduction: carbon-motivated border tax adjustments, industry exemptions from carbon regulation, and output-based allocation of emission allowances. We find that none of these measures amounts to a “magic bullet” when both efficiency and equity criteria matter. Compared to unilateral emission pricing alone, border carbon adjustments are most effective in leakage reduction and promotion of global cost-effectiveness but can markedly exacerbate regional inequality; exemptions and output-based allocation tend to avoid distributional pitfalls but are less effective in leakage reduction and global cost savings; exemptions may even decrease global cost-effectiveness of unilateral emission abatement.

Will carbon motivated border tax adjustments function as a threat?

Due to large incremental carbon emissions, China might become an important target country of CBTA (carbon motivated border tax adjustments). To levy CBTA could reduce China’s emissions. Meanwhile, China’s emissions reduction could also be achieved by China’s climate policies (termed as CBTA-emissions-equivalent policies). This paper contributes to the discussion on CBTA by comparing the potential regional effects of CBTA and CBTA-emissions-equivalent policies. The main findings are as follows: (1) CBTA and CBTA-emissions-equivalent policies would result in relocations of outputs across regions and countries, affect the structure of economy and contribute to world’s emissions reduction. (2) There would be significant differences in the regional effects between CBTA and CBTA-emissions-equivalent policies. (3) Compared to carbon tax, CBTA would be a costly and inefficient policy instrument to reduce emissions, but could function as an effective coercion strategy. (4) These policies would result in competitiveness issue and rebound effects, wherein different countries would be affected differently. China is a large economy and energy consumer with high openness to international trade. Looking ahead, the Chinese government should consider the potential interactions between China and other economies when designing tax reforms.

HOW LARGE ARE THE IMPACTS OF CARBON MOTIVATED BORDER TAX ADJUSTMENTS?

This paper discusses the size of impact of carbon motivated border tax adjustments on world trade and welfare. We report numerical simulation results which suggest that impacts on welfare, trade, and emissions will likely be small. This is because proposed measures use carbon emissions in the importing country in producing goods similar to imports rather than carbon content in calculating the size of barriers. Moreover, because border adjustments involve both tariffs and export rebates, it is the differences in emissions intensity across sector rather than emissions level which matters. Where there is no difference in emissions intensities across sectors, Lerner symmetry holds for the border adjustment and no relative effects occur.

Impacts of carbon motivated border tax adjustments on competitiveness across regions in China

China is a large developing country with high carbon intensity. It is likely that China will have to face the challenge of CBTA (carbon motivated border tax adjustments) in future. Meanwhile, CBTA would create price gap between CBTA users and target countries, and change the competitiveness of different producers. Under such circumstances, this paper seeks to contribute to the debate on CBTA by focusing on the potential impacts of CBTA on different regions of China from a perspective of competitiveness. We adopt two geographical divides in China (eastern–central–western zones, high-trade-openness to low-trade-openness regions), and simulate the potential impacts across regions through a general equilibrium model. Our simulation results show that CBTA would affect competitiveness of different producers, their comparative advantages, relative trade shares, outputs and emissions. CBTA would induce structure change of the economy, and result in a shift of industrial output toward non-industrial output. There are significant differences in the effects of CBTA among different regions in China. CBTA would result in a relocation of outputs across regions in China. Therefore, CBTA would also have impact on China’s regional development policy.