Working paper

Border adjustment measures as instruments to reduce emissions leakage

We analyze carbon-related BAMs (focused on imports) as potential instruments to reduce emissions leakage. We combine an approach from international trade law with an economic approach. For the legal aspect we discuss the elements needed to include carbon-related BAMs within the current GATT and WTO frameworks. For the economic aspect, we assess the effects of leakage and of BAMs to tackle it within an optimal climate policy model and a general equilibrium model. We find that the design and implementation of these BAMs would be difficult to bring in compliance with current international trade law and it may entail high transaction costs. Moreover, we observe that the severity of leakage may be amplified by international trade and that BAMs help in reducing it. Finally, we find that welfare effects of introducing carbon-related BAMs are ambiguous and thus they may not represent a credible threat to involve other actors in the international climate regime.

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