Theory and Impact
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Soocheol Lee, Kazuhiro Ueta, Janet E. Milne and Hope Ashiabor
Chapter 6: Addressing the inequality issue under border carbon adjustment
Border carbon adjustment (BCA) aims to address the competitiveness and carbon leakage concerns caused by the asymmetric requirements for developed and developing countries regarding their domestic mitigation under the Kyoto Protocol. Depending on the nature of domestic carbon pricing policy, BCA measures can take two different forms. One is border tax adjustment (BTA), under which a carbon tariff is levied on imported products. Another form requires importers to surrender allowances under a cap-and-trade system. As a trade measure, BCA has received political attention and was included in several legislative proposals for domestic climate policy. The 2009 American Clean Energy and Security Act passed by the House includes a provision on border adjustment measures. In January 2012, the European Commission decided to include emissions from international aviation to and from EU 27 countries in the EU Emissions Trading System, which gave further momentum to the global discussions over BCA. In this chapter, we argue that although BCA measures can level up the playing field of foreign producers to the same level as domestic producers, these measures cause another form of inequity in favour of the BCA-implementing countries because they charge the carbon costs of imports but do not issue corresponding emission credits to offset the emissions from the exporting countries. We propose a solution and use a multi-region computable general equilibrium (CGE) analysis to support our proposal.
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