Nations Differ on Climate Policies—But What Does That Mean for International Trade?

To contend with the global web of national climate policies, new research from Resources for the Future (RFF) presents multiple policy options that could create fair trading conditions while incentivizing lower carbon emissions.

Date

July 29, 2021

News Type

Press Release

A new working paper and blog post by scholars at Resources for the Future (RFF) outline a possible way forward for border carbon adjustments (BCAs) in the complex global landscape of national climate policies. In their analysis, the authors consider ways to create fair conditions for both domestic and foreign products while simultaneously decreasing global carbon emissions.

BCAs—also referred to as carbon border adjustment mechanisms or border tax adjustments—have made news recently as both the European Union and the United States have introduced proposals that would impose a tax on trade partners who do not have comparable climate regulations in place. Despite the challenges on the road ahead for these proposals, economists and decisionmakers are recognizing the potential need for BCAs.

“This policy option is picking up speed,” said RFF Senior Fellow William Pizer, who coauthored the work. “With an international community that is increasingly attuned to national climate policies that vary widely in their ambition, it seems almost inevitable that BCAs will be a part of the future of trade.”

But what does a BCA look like when trading countries have climate policies that look very different? Some nations, like the United States, have climate policies that aren’t tied to a price on carbon. Others may have a “partial price” policy that sets a carbon price on only some of a product’s actual emissions.

Challenges abound in quantifying trading partners’ efforts in comparison to one’s own efforts, and then translating that into a tax rate applied to imports. The new RFF research seeks to lay out a policy approach that could apply in all these tricky cases. The graphic below from the working paper explains the overarching ideas for how different climate policies may interact and lead to various CBAM designs and parameters:

Notably, this paper does not discuss the legal challenges posed by the World Trade Organization and international trade rules.

"There are a lot of other pieces to this puzzle,” said RFF Research Analyst Erin Campbell, who cowrote the working paper and blog. “The international stage presents many valid questions about fairness, what data and metrics are used, and what is or isn’t exempted. But separate from that, economically, BCAs can be designed to address the nuances of differing domestic climate policies.”

For more, read the working paper, “Border Carbon Adjustments without Full (or Any) Carbon Pricing,” and the related blog post, “Border Carbon Adjustments: How to Implement in Countries That Don't Have a Carbon Price"

Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.

Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.

For more information, please refer to our media resources page or contact Media Relations Associate Anne McDarris.

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