Comments: Carbon Tariffs - Fair Incentives for Change?

Carbon credits, carbon taxes, and emissions trading systems are familiar terms in discussions about limiting global warming, the Paris Agreement, and net-zero emissions goals. A more recent addition to the glossary of climate policy is “carbon tariff.” While the concept is not new, it recently surfaced in nascent policymaking in the EU. In 2019, European Commission President Ursula von der Leyen proposed a “carbon border adjustment mechanism (CBAM)” as part of a proposed green deal. In March, the European Parliament adopted a resolution on a World Trade Organization (WTO)-compatible CBAM. A carbon tariff, or the EU’s CBAM, is a tax applied to carbon-intensive imports. Countries that have pledged to be more ambitious in reducing emissions—and in some cases have implemented binding targets—may impose carbon costs on their own businesses. Being eyed now are cross-border or overseas businesses that make products in countries in which no costs are imposed for emissions, resulting in cheaper carbon-intensive goods. Those products are exported to the countries aiming for reduced emissions. The concern lies in the risk of locally made goods becoming unfairly disadvantaged against competitors that are not taking similar steps to deal with climate change. A carbon tariff is being considered to level the playing field: local businesses in countries applying a tariff can better compete as climate policies evolve and are adopted around the world. Complying with WTO rules to ensure fair treatment, the CBAM will be imposed only on high-emitting industries that compete directly with local industries paying a carbon price. In the short term, these are likely to be steel, chemicals, fertilizers, and cement. The Parliament’s statement introduced another term to the glossary of climate policy: carbon leakage. “To raise global climate ambition and prevent ‘carbon leakage,’ the EU must place a carbon price on imports from less climate-ambitious countries.” It refers to the situation that may occur if businesses were to transfer production to other countries with laxer emission constraints to avoid costs related to climate policies. This could lead to an increase in total emissions in the higher-emitting countries. “The resolution underlines that the EU’s increased ambition on climate change must not lead to carbon leakage as global climate efforts will not benefit if EU production is just moved to non-EU countries that have less ambitious emissions rules,” the Parliament said. It also emphasized the tariff “must not be misused to further protectionism.” A member of the environment committee, Yannick Jadot, said, “It is a major political and democratic test for the EU, which must stop being naïve and impose the same carbon price on products, whether they are produced in or outside the EU, to ensure the most polluting sectors also take part in fighting climate change and innovate towards zero carbon. This will give us the best chance of remaining below the 1.5°C warming limit, whilst also pushing our trading partners to be equally ambitious in order to enter the EU market.” The Commission is expected to present a legislative proposal on a CBAM in the second quarter of 2021 as part of the European Green Deal.

DESIGNING A GLOBALLY ACCEPTABLE CARBON TAX SCHEME TO ADDRESS COMPETITIVENESS AND LEAKAGE CONCERNS

To address competitiveness and leakage concerns in international climate policy, this paper proposes a differentiated carbon tax scheme (DCT), which largely preserves the relative competitive positions of developed and developing countries. The paper first presents a theoretical model from which to derive the DCT. Then, employing a global trade analysis model, competitiveness and leakage effects under a DCT are simulated and contrasted to those of a unilateral carbon tax, a carbon tariff, and a uniform carbon tax. The results of our analysis suggest that: (1) under the proposed DCT, emission reductions in developed and developing countries are higher and leakage is lower than under a carbon tariff; (2) the DCT has weaker competitiveness effects than a carbon tariff; and (3) the DCT is more favorable to developing countries’ output and welfare than a carbon tariff or a uniform global carbon tax. Developing countries may therefore embrace a DCT as an intermediate step towards the implementation of a global carbon tax.

Carbon Tariff vs. Emission Cap of North–South Countries in Response to Manufacturer’s Production

Economy prosperity has concurrently caused severe emission damages worldwide, which calls for strong abatement efforts from both nations and manufacturers. In this paper, we establish a two-stage game to investigate the policy selections of a foreign developed country (North) and a domestic developing country (South), and the response of a Southern manufacturer. The welfare-maximizing governments in the two countries participate in an announcement game of environmental policies where the South decides on whether or not to enforce an emission cap and the North chooses either a carbon tariff or no policy, after which the profit-seeking manufacturer reacts to make production strategies and distribute differentiated products to the two countries. Our analysis shows that under an emission cap, the manufacturer shrinks product quantities in both markets, cuts emissions, and suffers profit losses. A carbon tariff has similar impacts on the manufacturer except for unaffected domestic sales. In addition, equilibrium policy selections for the two governments depend on the degree of emission damage in the South: A moderate level of damage generates an equilibrium in the scenario of the unilateral tariff policy where the Northern welfare peaks and the Southern well-being is not the worst; a severe damage leads to a prisoner’s dilemma, since the two governments would arrive at an equilibrium in the bilateral-policy scenario, but it is dominated by a no-policy scheme. What is more, we find that a negotiation between the two governments is able to help them out of the dilemma and achieve a Pareto-improving outcome.

Impacts of U.S. Carbon Tariffs on China’s Foreign Trade and Social Welfare

A recursive multisector dynamic computable general equilibrium (DCGE) model simulates the economic impacts of carbon tariffs, as proposed by the USA, ranging from $40/t to $60/t CO2. We examine a carbon tax and export subsidy as response policies to the U.S. carbon tariff, respectively. The dynamic model shows the possible impacts of these policies on China’s economic structure, carbon emissions, and social welfare from 2020 to 2030. Simulations show that a carbon tariff changes the structure of China’s exports and promotes trade diversion from the USA to other countries and regions. A domestic carbon tax and subsidy policy can dampen the adverse impacts of carbon tariffs on trade. A carbon tax shows an effective impact on increasing clean energy use, decreasing the carbon intensity of output, and reducing carbon emissions. A subsidy on exports to the USA reduces the adverse impact of a carbon tariff on China’s social welfare in the short term.

Carbon Tariffs’ Impacts on China’s Economy and Carbon Emission: A Study Based on META-Regression Analysis

During the implementation of the measures for reducing carbon emissions, to protect the international competitiveness of their carbon-intensive products, some developed countries in the name of preventing carbon leakage have deliberately avoided the principle of “common but differentiated responsibilities (CBDR)” prescribed in the United Nations Framework Convention on Climate Change and worked actively to propose the collection of carbon tariffs to make developing countries share the responsibilities of reducing global emissions. The existing studies tend to confirm that carbon tariffs, once put into practice, will directly affect the export trade of developing countries represented by China, and particularly exert a significant negative impact on the export trade of those countries’ carbon-intensive industries. This paper used META-regression analysis to summarize and quantitatively analyze the results of an empirical research that uses computable general equilibrium (CGE) models to research on the impacts brought by carbon tariff policy to China’s economy and carbon emissions, finding that the sample characteristics, model specification and the assumption about carbon tariff rates in the research exert direct impacts on the final conclusions of empirical stimulation. Although carbon tariffs are still in the proposal stage, due to the vaccum of international governace in this area, the developed countries have a room to carry out the policies related to carbon tariffs or invisible carbon tariffs. Studies show that carbon tariff policy will deal a blow to China’s export trade and further undermine China’s overall economic output and welfare level, while producing very limited effects on carbon emissions reduction. Therefore, the Chinese Government should stick to its basic position as resolving carbon tariffs-related issues under the United Nations Framework Convention on Climate Change, actively promote relevant international governance mechanisms, formulate targeted countermeasures, improve the export structure of industrial products, optimize industrial structure and also stay alert to some developed countries’ attempt to avoid the disputes over carbon tariffs and use some invisible carbon tariffs to set up new trade barriers.