Conference Agenda

The European Union just added a carbon border adjustment mechanism (CBAM) to its carbon emission trading system (EU ETS) to protect industries covered by the ETS from imports lacking equivalent carbon prices and mitigate carbon leakage. Other developed countries are also contemplating carbon border adjustments, and thus their impacts on global trade and economic growth become a critical concern for many countries. We develop a dynamic recursive global model with 10 world regions and 29 sectors to simulate the impacts of the EU CBAM on trade and output. We find that the EU ETS without a CBAM causes significant carbon leakage due to increased fuel consumption and energy-intensive manufacturing activities outside the EU. Adding CBAM tariffs only marginally reduces this leakage, from 59.4% to 54.6%, due to a shift to imports from cleaner regions. The carbon tariffs adversely affect China and India, as they reduce exports covered by the CBAM, while countries like the US and other countries with lower carbon intensities, experience minimal aggregate economic impacts. However, the CBAM hurts non-CBAM sectors within the EU, leading to a lower EU GDP.

Can carbon taxes and associated carbon border adjustments (CBAs) respect existing agreements in international trade while significantly reducing pollution from carbon emissions? This paper answers this question in the context of a quantitative trade-and-emissions model for both non-cooperative (Nash) and cooperative (international negotiation with participation constraints) carbon tax setting. We find that a climate agreement that deviates from the usual design of uniform carbon taxes applied across its members and instead entertains the possibility of country-specific carbon taxes as a means of addressing participation constraints can achieve substantial reductions in worldwide emissions and offer a meaningful WTO-consistent alternative to the climate clubs described by Nordhaus (2015) that confront non-participants with the threat of WTO-inconsistent Nash tariff punishments. And we find that the design of CBAs permitted by the WTO can impact the degree of worldwide carbon reduction and welfare improvements in important ways. In particular, our findings suggest that optimal WTO rules on permissible CBAs will evolve with the evolving success of international cooperation over climate policy.

Scrap availability limits how quickly global steel production can decarbonize. This paper shows that a border carbon adjustment can eliminate classic import carbon leakage but triggers resource shuffling: as regulated regions demand more of the cleaner, scrap-based steel, unregulated regions shift towards dirtier one. I develop a dynamic trade model with three steel production routes and endogenous scrap generation from depreciating product stocks. Higher carbon prices raise global scrap demand, improving waste-processing efficiency globally. However, the regulated region absorbs a disproportionate share of scrap supply for newly-created clean demand, driving up scrap prices and forcing the unregulated region into dirty consumption. This resource-shuffling effect diminishes as steel stocks accumulate over time and relax the scrap constraint.

Carbon leakage limits the effectiveness of unilateral climate policy. This paper develops a quantitative general equilibrium trade model with global value chains, carbon emissions, and heterogeneous firms to study the effect of carbon pricing and leakage mitigation tools. I show that the selection of heterogeneous firms generates first-order consumption effects of carbon pricing by affecting firm entry across sectors. An application to EU climate policy highlights that these selection effects increase the consumption loss of carbon pricing. At the same time, they create scope for recycling carbon revenues toward industrial policy, which limits these losses. The results further indicate a trade-off across common leakage mitigation tools. Border adjustments more effectively reduce leakage, while output-based rebates attenuate consumption losses.