- Journal Article
A new study evaluates the potential of two trade restriction strategies to compel non-compliant countries to meet their Paris Agreement climate targets.
The first strategy is for compliant countries to impose border carbon adjustments (BCAs)—tariffs on embodied carbon emissions—on non-compliant countries. A commercial product’s embodied emissions are those produced in its manufacture, assembly and transport. Such BCAs would reduce the competitiveness of exports from non-compliant countries, thereby giving them an incentive to meet their Paris commitments (and avoid BCAs). The second strategy is for compliant countries to impose “strategic tariffs” on non-compliant countries. Strategic tariffs aim to improve the terms-of-trade—the ratio between a country’s export prices and import prices—of the country imposing them, thus boosting national economic growth while penalizing other countries.
Applying a numerical economy-wide model with energy-sector detail that’s derived from the Joint Program’s Economic Projection & Policy Analysis (EPPA) model, the study assessed the potential of each trade restriction strategy for moving the U.S. from non-compliance (at the national level, its current position is to allow unrestricted greenhouse gas emissions) to compliance with its Paris climate pledge.
The study found that when BCAs were imposed on U.S. exports, the nation’s welfare losses (measured as the overall change in income due the policy that’s in effect) were significantly lower than what they would be if the U.S. complied with its Paris pledge. So the imposition of BCAs on its exports would offer the U.S. no economic incentive to shift from non-compliance to compliance.
A simulation of the impact of strategic tariffs—which are much higher than BCA rates—on a non-compliant U.S. showed that a trade war would result, leading to larger domestic welfare losses than what they would be if the U.S. complied with its Paris pledge. At the same time, Paris-compliant countries imposing strategic tariffs on the U.S. would also suffer considerable welfare losses. The study concluded that strategic tariffs could be used to enforce Paris Agreement commitments as long as compliant countries are willing to absorb substantial economic losses on the home front.