July 2010: The Organisation for Economic Co-operation and Development (OECD) has published a working paper titled “Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis,” which addresses calls for mechanisms to reduce possible harm to domestic competitiveness from unilateral emissions reduction policies, in the absence of global regulation.

The paper uses an economic global general equilibrium model to assess the economic effects of carbon-based border-tax adjustments (BTAs) that, for example, could come in the form of import taxes or the forced surrender of emissions allowances from domestic emissions trading schemes. The report’s three main findings are: BTAs can reduce carbon leakage if only a small number of countries are trying to reduce emissions, as leakage would be a function of trade competitiveness; BTAs create, at best, small welfare increases; and BTAs do not necessarily compensate for output losses of the energy-intensive industries they are intended to insulate. The paper also notes that it does not consider in its analysis the possible administrative costs of BTAs or retaliation risks, in terms of reciprocal taxes in other countries, both of which would further reduce benefits of BTAs. [The Working Paper]