Chapter 15: Carbon leakage measures and border tax adjustments under WTO law
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One of the major obstacles toward the adoption of mandatory limits on greenhouse gas emissions is the impact of such limits on the international competitiveness of domestic firms. Limits on greenhouse gas emissions – be they in the form of regulation, a carbon tax or a cap-and-trade system – may impose extra costs on domestic industries. Where foreign firms do not bear similar costs, domestic firms may lose their competitive edge. In particular, with a domestic climate policy in place, imports from countries without mandatory carbon restrictions may gain a price advantage over domestic goods. It is exactly this asymmetry that led the US Senate to reject the Kyoto Protocol, an international agreement that did not require emission cuts from developing countries. The competitiveness impact of climate change policy may play out both at home (on the domestic market) and abroad (on world markets). It can be particularly acute for energy-intensive manufacturers such as the iron and steel, aluminium, cement, glass, chemicals and pulp and paper industries.

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