Reconciling Climate Change and Trade Policy

There is growing clamor in industrial
countries for additional border taxes on imports from
countries with lower carbon prices. The authors confirm the
findings of other research that unilateral emissions cuts by
industrial countries will have minimal carbon leakage
effects. However, output and exports of energy-intensive
manufactures are projected to decline potentially creating
pressure for trade action. A key factor affecting the impact
of any border taxes is whether they are based on the carbon
content of imports or the carbon content in domestic
production. Their quantitative estimates suggest that the
former action when applied to all merchandise imports would
address competitiveness and environmental concerns in high
income countries but with serious consequences for trading
partners. For example, China s manufacturing exports would
decline by one-fifth and those of all low and middle income
countries by 8 per cent; the corresponding declines in real
income would be 3.7 per cent and 2.4 per cent. Border tax
adjustment based on the carbon content in domestic
production, especially if applied to both imports and
exports, would broadly address the competitiveness concerns
of producers in high income countries and less seriously
damage developing country trade.