The Iceberg is Melting - What can Border Carbon Adjustment do about it?

Abstract: Global warming, caused by emissions of carbon dioxide (CO2) and other greenhouse gases, is one of the greatest challenges that the world is facing. As a measure for coping with this problem border carbon adjustment (BCA), i.e. tax on imports produced via technology yielding high CO2 emissions, has attracted great attention among policymakers. The effects of BCA have been simulated in computable general equilibrium (CGE) models, but the Armington structure of conventional CGE models does not coincide with stylized facts on extensive margins in disaggregate trade data. Therefore, we simulate effects of BCA, instead using the Eaton and Kortum (2002) model, which is consistent with facts on extensive margins. Our results indicate a slightly stronger effect on relocation of production and emissions than previous findings. Global manufacturing CO2 emissions decrease by 0.69% in the short run. More importantly, we find large impact differences on countries at different stages of economic development - an aspect with strong policy implications that previous evaluations have not addressed sufficiently.