Publication

This paper carries out a detailed sensitivity analysis of border carbon adjustment by applying a global Computable General Equilibrium (CGE) GTAP7-based model. It finds different incentives for the regions in the climate coalition to raise carbon-based border tax rates (BTAX) above the standard rate that mimics an equalisation of carbon prices across regions. Higher BTAX can reduce carbon leakage but with a declining marginal effect. Furthermore, there are different incentives for regions outside the coalition to oppose high BTAX rates: Russia and the other energy exporters would oppose it, while the Low-Income Countries would not because of benefits from the trade diversion effect. Thus, BTAX encourages the former to join the coalition, while compensating transfers are necessary to encourage the other countries including China and India.