Coordinating Climate and Trade Policies: Pareto Efficiency and the Role of Border Tax Adjustments
International Monetary Fund, Dec 7, 2012 - Business & Economics - 26 pages
This paper explores the role of trade instruments in globally efficient climate policies, focusing on the central issue of whether some form of border tax adjustment (BTA) is warranted when carbon prices differ internationally. It shows that tariff policy has a role in easing cross-country distributional concerns that can make non-uniform carbon pricing efficient and, more particularly, that Pareto-efficiency requires a form of BTA when carbon taxes in some countries are constrained, a special case being identified in which this has the simple structure envisaged in practical policy discusions. It also stresses—a point that has been overlooked in the policy debate—that the efficiency case for BTA depends critically on whether climate policies are pursued by carbon taxation or by cap-and-trade.
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abroad Aldy analysis Appendix assumed border tax adjustment cap-and-trade carbon emissions carbon leakage carbon prices carbon tax rates CESIfo characterized charge on imports climate and trade climate change climate policies collectively efficient collinear commodity constrained country constrained Pareto-efficient cooperative Copeland country 2’s country h country sets denotes deployed difference in carbon differentiation distributional concerns efficient tariff emissions in country environmental envisaged in practical equilibrium form of BTA global emissions globally efficient gross output higher carbon taxes implies instruments International Economics international trade international transfers Kotsogiannis market clearing Markusen N-vector non-numeraire optimal Pareto efficiency requires Pareto-efficient allocation Pigovian level pollution producer prices Proof of Proposition Public Economics reﬂect revenue function role sets its carbon social welfare function tariff policies tariff structures tariff vectors tariffs and carbon tariﬁcs taxation taxes and tariffs trade policies unconstrained carbon tax uniform across sectors unit of output University of Exeter welfare weights world prices