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Coordinating climate and trade policies: Pareto efficiency and the role of border tax adjustments

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  • Keen, Michael
  • Kotsogiannis, Christos

Abstract

This paper explores the role of trade instruments in globally efficient climate policies, focusing on whether or not some form of border tax adjustment (BTA) is warranted when carbon prices differ internationally. The analysis shows that, while there is no case for BTA when all instruments can be freely deployed, Pareto-efficiency does require a form of BTA when carbon taxes in some countries are constrained: its purpose then is to partly counteract the impact on emissions of inappropriate carbon pricing there, or, equivalently, to undo the trade distortions such pricing creates. The required form of BTA is generally complex, but a special case is identified in which it optimally has the simple structure envisaged in practical policy discussions. It is also shown that the efficiency case for BTA depends critically on whether climate policies are pursued by carbon taxation or by cap-and-trade.

Suggested Citation

  • Keen, Michael & Kotsogiannis, Christos, 2014. "Coordinating climate and trade policies: Pareto efficiency and the role of border tax adjustments," Journal of International Economics, Elsevier, vol. 94(1), pages 119-128.
    • Handle: RePEc:eee:inecon:v:94:y:2014:i:1:p:119-128
    DOI: 10.1016/j.jinteco.2014.03.002
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    More about this item

    Keywords

    Environmental taxation; Cap-and-trade; International trade; Pareto efficiency; Border tax adjustments;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • F18 - International Economics - - Trade - - - Trade and Environment

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