Conference Agenda

We study how climate, industrial and trade policies should be coordinated to improve efficiency and level the playing field while achieving a global greenhouse gas emissions target. We distinguish between cost-effectiveness—the cost of achieving the target—and allocative efficiency—the realization of gains from trade across countries. When trading partners face heterogeneous carbon prices, a carbon border adjustment mechanism (CBAM) can level the playing field and improve cost-effectiveness, but at the expense of allocative efficiency. Although a CBAM generally reduces global emissions, it may in some cases increase them. When emissions fall, lowering the carbon price when the CBAM is introduced improves both efficiency and fair competition while preserving the global emissions outcome. We further analyze how CBAMs should be adapted to different policy regimes, including cap-and-trade systems with free allowance allocation and emissions-intensity standards. Finally, we consider a setting in which one trading partner subsidizes decarbonization (green industrial policy) rather than pricing carbon. In this case, applying the full carbon price to imports reduces efficiency; cost-effective emission reductions require charging only the carbon price net of the subsidy. We illustrate our results using quantitative simulations calibrated to the iron and steel industry, focusing on the European Union and China.