The role of border carbon adjustment in unilateral climate policy: Overview of an Energy Modeling Forum study (EMF 29)

• Published in: Energy economics Vol. 34; no. Supplement; pp. S97 - S110
• Main Authors: Böhringer, Christoph, Balistreri, Edward J., Rutherford, Thomas F.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.12.2012
• Subjects: Border carbon adjustment; Borders; Carbon; Carbon emissions; Carbon leakage; Climate; Climate change; Competitiveness; Cost; Cost effectiveness; Economic crisis; Economics; edge effects; EMF; Emissions control; Emissions trading; energy; Energy economics; Energy policy; Environmental policy; Industry; issues and policy; Leakage; Policies; Prices; Saving; Unilateral climate policy; Q58; D58; Unilateral climate policy; Carbon leakage; F18; Border carbon adjustment; D61
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2012.10.003

Issues of emission leakage and competitiveness are at the fore of the climate policy debate in all the major economies implementing or proposing to implement substantial emission cap-and-trade programs. Unilateral climate policy cannot directly impose emission prices on foreign sources, but it can complement domestic emission pricing with border carbon adjustment to reduce leakage and increase global cost-effectiveness. While border carbon adjustment has a theoretical efficiency rationale, its practical implementation is subject to serious caveats. This article summarizes the results of an Energy Modeling Forum study (EMF 29) on the efficiency and distributional impacts of border carbon adjustment. We find that border carbon adjustment can effectively reduce leakage and ameliorate adverse impacts on energy-intensive and trade-exposed industries of unilaterally abating countries. However, the scope for global cost savings is small. The main effect of border carbon adjustment is to shift the economic burden of emission reduction to non-abating countries through implicit changes in international prices. ► Border carbon adjustment can reduce emission leakage. ► The global efficiency gains from border carbon adjustment are modest. ► The cost shifting effects of border carbon adjustment are substantial - • in particular when applied from OECD to non-OECD countries. ► Given the limited scope for efficiency gains and the burden shifting potential, border carbon adjustment need to be handled with care.