Because carbon taxes can lead to loss of competitiveness, applying tariffs on imports from carbon-friendly countries helps address the cost disadvantage faced by producers in carbon-restricting countries. Such tariffs, known as border carbon adjustments (“BCAs”), can also help reduce possible carbon “leakage,” or the growth in foreign emissions due to increased production of carbon-intensive goods in carbon-friendly countries. We demonstrate that BCAs whose levels do not exceed the level of exaction imposed by the domestic carbon tax can be implemented consistently with World Trade Organization (“WTO”) anti-discrimination rules. However, such “neutral” BCAs might be inefficiently high from a global welfare perspective. This stems from the misaligned focus of BCAs on imports rather than production—the real cause of emissions. The discrepancy between neutrality and efficiency enables carbon-restricted industries to seek neutral, though inefficiently high BCAs. Recognition of this discrepancy strengthens the case for multilateral alternatives that curb global carbon emissions.

Areas of Focus: Climate Change
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Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
Climate Economics
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Climate Economics
Climate change will affect every sector of the economy, both locally and globally. EPIC research is quantifying these effects to help guide policymakers, businesses, and individuals working to mitigate and...
Climate Law & Policy
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Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.