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Economic and environmental effects of border tax adjustments

: Peterson, E.; Schleich, J.
: Fraunhofer-Institut für System- und Innovationsforschung -ISI-, Karlsruhe

Fulltext urn:nbn:de:0011-n-559250 (235 KByte PDF)
MD5 Fingerprint: 3e220b4cc1a27babc81311531a70db3d
Created on: 01.05.2007

Karlsruhe: Fraunhofer ISI, 2007, 41 pp.
Sustainability and Innovation, S1/2007
Report, Electronic Publication
Fraunhofer ISI ()

Taxing imports from regions which are not subject to climate policy and subsidizing exports into these regions have recently been proposed by to address presumed negative effects of the EU Emissions Trading System (EU ETS) on industry competitiveness and carbon leakage. This paper analyzes the economic and environmental effects of several border tax adjustment (BTA) mechanisms using a static general equilibrium model. Three alternative BTA mechanisms are considered: BTA tax and subsidy rates based on product carbon content of the imported products, BTA rates based on EU product carbon content, and BTA rates based on product carbon content using best available technologies. We also consider alternative sets of industries that are subject to the BTA depending on whether only those industries directly covered by the EU ETS benefit from BTAs, or also those which are indirectly affected by the EU ETS via higher electricity prices.
Because the BTAs are focused on sectors which are significant emitters of CO2, the goal of reducing or eliminating any competitive distortions through import tariffs and export subsidies will lead to higher levels of output from these industries than would be the case without the BTA. Thus there must be a commiserate shift in emission reductions towards sectors not included in the BTA and private households to achieve the regional emission targets specified under the Kyoto Protocol. Because the marginal abatement costs of reducing CO2 emissions from non-energy intensive sectors and the private household will likely be higher, implementing a BTA's will result in higher carbon taxes. Unless all industry sectors are subject to the BTA, the higher carbon tax rate under a BTA decreases the competitiveness of other sectors in the EU which do not directly benefit from a BTA. Thus, a BTA may set off political pressure from other "domestic" players who face higher commodity prices and who must contribute more to emission reductions.