Journal Article

Trade, climate change, and the political game theory of border carbon adjustments

Dieter Helm, Cameron Hepburn and Giovanni Ruta

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 28, issue 2, pages 368-394
Published in print January 2012 | ISSN: 0266-903X
Published online June 2012 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grs013
Trade, climate change, and the political game theory of border carbon adjustments

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The lack of real progress at the Durban climate change conference in 2011—postponing effective action until at least 2020—has many causes, one of which is the failure to address trade issues and, in particular, carbon leakage. This paper advances two arguments. First, it argues that the conventional view of Border Carbon Adjustments (BCAs) as a ‘dirty’ trade barrier should be turned on its head. Rather, the absence of a carbon price comprises an implicit subsidy to dirtier production in non-regulated markets. Second, BCAs could act as a game-changer when climate policy negotiations move at a glacial pace, if at all. Materially stronger progress could be achieved indirectly from the threat of unilateral trade policies. The paper shows how this could come about, using a simple political game theory model. The appropriate game form is one in which parties move unilaterally and sequentially, given the failure to agree on a common course of action, and are fully aware of the impacts of their actions. The paper shows that properly crafted BCAs could help reduce trade distortions, limit the competiveness effects, and help build a broader coalition of interests for more global actions.

Keywords: trade policy; government policy; game theory; carbon tax; border carbon adjustments; emissions trading schemes; C700; Q560; Q580

Journal Article.  13494 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Environmental Economics

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