Competitiveness and Climate Policies: Is There a Case for Restrictive Unilateral Trade Measures

Brief
Date period
17 December 2009

SummaryWhile further climate change seems inevitable, the damages can be limited if concrete and substantive action is taken to significantly reduce carbon and other greenhouse gas (GHG) emissions. Although the optimal solution, a global deal resulting in the necessary cuts in global emissions, is well understood, it is by no means certain that world leaders will be able to achieve it. Views differ on who should bear the responsibility and who should pay.

If only some countries take action, there is a risk that their efforts will be rendered futile as some emissions could simply move to countries with less strict climate-change regulations, thereby resulting in so-called carbon leakage. This could also result in distortions to competitiveness, particularly for energy- and carbon-intensive industries, as producers in mitigating countries would face costs for reducing emissions and compete against firms not burdened or burdened less by such costs. In response to these considerations and in order to leverage participation of developing countries in an eventual global deal, legislators, industry leaders and lobbyists have come up with the idea of using measures at the border, socalled border carbon adjustments (BCAs). However, multiple objections have been raised against such measures. These objections are based on questions of effectiveness as well as economic and legal concerns. Understanding the possible merits and impacts of the eventual use of BCAs is particularly relevant in the context of current uncertainty with respect to the outcome of the Copenhagen Climate Conference in 2009. If there is no success in securing a full-fledged global deal, national policies and measures, eventually including BCAs, may well end up acting as the primary instruments in curbing global carbon emissions.

This paper provides a short overview of some of the proposals related to BCAs and discusses them from an economic and legal perspective. It also takes a preliminary look at potential consequences for developing countries’ production and trade should BCAs be introduced in major markets.