Border carbon adjustment: Implications for trade and national emissions

Event: 2013 International Forum for Sustainable Asia and the Pacific (ISAP)

The Kyoto Protocol required only developed countries to reduce their emissions but did not require developing countries to do so, and this created an asymmetric condition for developed and developing countries to implement domestic climate policies. Implementing a domestic climate policy in developed countries, such as an emission trading system or a carbon tax system, means an additional carbon cost to the production cost and changes in the terms of trade between the policy implementing and non-implementing countries.This has resulted in two great concerns: one is for the industrial competitiveness and the other is for the carbon leakage through the production channel, re-location through investment channel and the energy channel due to the lower global energy price and more consumption in non-implementing countries. In this presentation, we pointed out a hidden inequality in accounting for trade-related emissions in the presence of border carbon adjustment. Under a domestic carbon pricing policy, producers pay for the carbon costs in exchange for the right to emit. Under border carbon adjustment, however, the exporting country pays for the carbon costs of their exports to the importing country but not be given any emission credits. As a result, export-related emissions will be remained in the national inventory of the exporting country based on the UNFCCC inventory approach. This hidden inequality is important to climate policy but has not yet been pointed out. To address this issue we propose a method of National Inventory Adjustment for Trade, by which export-related emissions will be deducted from the national inventory of the exporting country and added to the national inventory of the importing country which implements border carbon adjustment. To assess the policy impacts, we simulated a carbon tax policy with border tax adjustment for Japan using a multi-region computable general equilibrium model. The results indicate that with the National Inventory Adjustment for Trade, both Japan’s national inventory and the carbon leakage effects of Japan’s climate policy will be greatly different.