Working Paper: Climate Change Mitigation and Trade Rules: The Opportunities and Limitations of Neutral Border Tariffs
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.