Carbon border adjustment: a unilateral solution to the multilateral problem?

Abstract

This study investigates whether the rationales for introducing carbon border adjustments (CBA) are consistent with theoretical predictions. Specifically, it addresses the following questions. When CBA is theoretically modelled for a level playing field in international trade, does it encourage climate efforts in developing countries, and does it improve global climate effectiveness? What are the implications for international environmental cooperation? The study highlights how the strategic interdependence between countries changes with the introduction of CBA by using a model that incorporates CBA into the two-stage reciprocal-markets model originated by Brander and Spencer (1984). Recognising that CBA is unidirectional, whereby only a country with a more stringent climate policy can impose CBA on imports, the results demonstrate that introducing CBA creates an incentive discrepancy between developed and developing countries; the former (the latter) may adopt a more aggressive (defensive) domestic climate policy.