Unilateral Climate Policies: The Theoretical Economic Background

Abstract

This chapter briefly reviews a number of research results from the theoretical economic literature that help us understand the consequences of introducing consumption-based approaches in international climate policy. In the 1970s, economists started to compare the economic efficiency of different systems of environmental taxation in unilaterally correcting a global externality. They found that, to be efficient, unilateral policies should neither solely rely on production taxes, nor solely on consumption taxes, but on a combination of these two taxes or a combination of either of these taxes with “less than full” border adjustments. With the signing of the Kyoto Protocol, the research focus shifted to a specific form of inefficiency of unilateral climate policies—to carbon leakage. The most important economic “mechanisms” generating leakage were categorized as leakage channels. This study examines four such channels: the competitiveness, the energy market, the income, and the technology spillovers channel. Various counter-measures against leakage were suggested; one of them being border carbon adjustments. Recently, some authors have drawn attention to macroeconomic effects of such countermeasures that are not depicted in standard models. One such effect is that countries targeted by border carbon taxes might react with import substitution, which might lead to an increase instead of a reduction of emissions.