When one country decides to unilaterally implement climate legislation, there is concern that the emissions reduced locally will result in an increase in emissions elsewhere, with no net reduction in greenhouse gases. This phenomenon, known as leakage, can happen in two ways. First, if climate policies in one country or a group of countries reduce the global price of fossil fuels, countries without restrictions may increase their energy consumption. Second, some energy-intensive production could relocate to areas without restrictions, highlighting the sort of competitiveness issues that arise when only a subset of nations restricts emissions.
One of the methods of addressing the leakage and competitiveness issues that arise in these situations is through border carbon adjustments. Border carbon adjustments are tariffs that one or more nations with climate policies place on the emissions embodied in imports from nations without climate policies. Border carbon adjustments have been proposed in climate legislation, such as the 2009 Waxman-Markey bill. This bill proposed border carbon adjustment provisions on energy-intensive imports from countries that do not have an economy-wide climate policy at least as stringent as in the U.S.
But just how effective are these policies at addressing leakage and competitiveness concerns? “Border carbon adjustments are a controversial issue in international climate negotiations,” says Niven Winchester, an environmental energy economist at the MIT Energy Initiative and author of a recent report by the MIT Joint Program on the Science and Policy of Global Change that examines the impacts of border carbon adjustments.
“This study evaluates producer responses to border carbon adjustments that have not been considered previously, and provides important information for policymakers,” Winchester explains.
The report calculated the emissions embodied in a traded good by adding the direct emissions from fossil-fuel use and the indirect emissions from electricity used in production. Winchester then modeled different scenarios in which a “coalition” of countries established a cap-and-trade policy that restricted their emissions, but a “non-coalition” of countries did not. Finally, the analysis considered several different producer responses to border carbon adjustments.
The report found that if the producers of goods in non-coalition countries viewed the border carbon adjustments as an emissions tax and operated a separate production line for each market, leakage was reduced by about one-third. When non-coalition firms operated a single production line for all markets, firms reduce the emissions content of all energy-intensive production and leakage decreased by 80 percent. However, though this last scenario had the highest reduction in leakage, it also resulted in the lowest level of production of energy-intensive goods in coalition countries. This means that policymakers may face a trade-off between leakage and competitiveness concerns.
The study also considered a scenario in which non-coalition countries implemented a cap-and-trade policy. The model results showed that leakage could be completely eliminated with only a modest emissions cap in non-coalition countries. Though this is very unlikely in the near future, it does suggest that border carbon adjustments could serve as a coercion devise in global climate policy negotiations.