Assessment of Carbon Tax Policy and Border Carbon Adjustment: Implications for industrial competitiveness, carbon leakage and trade
There have been many proposals to address the competitiveness and carbon leakage concerns due to the asymmetric international arrangement for mitigating the global GHG emissions under the Kyoto Protocol. Carbon adjustment at the border has received special attention. The objective of border carbon adjustment (BCA) is to level the playing field between domestic regulated industries and foreign unregulated industries to the same level. Two practical issues related to the policy design of BCA are discussed in this paper. The first issue is how to determine the carbon content of imports/exports. Two criteria are examined: direct emissions versus embodied emissions. The second issue is the hidden inequality in accounting for trade-related emissions in the national GHG inventory when border carbon adjustment is implemented. A national inventory adjustment for trade is proposed to address the hidden inequality. A multi-region CGE model, GTAP6inGAMS, is applied to assess the economic and environmental impacts of a carbon tax on fossil fuels and BTA in Japan. To achieve her Kyoto target of 6% reductions in GHG emissions from the 1990 levels, Japan published a national law (1998) combating climate change and implemented the target achievement plan (2005). Furthermore, in October 2012 Japan started a carbon tax on fossil fuels to help achieve ambitious domestic targets. The ultimate tax rate is JP¥289/t-CO2 (~US$3/t-CO2), which will be reached gradually in three steps. The impacts of Japan’s carbon tax and BTA on industrial competitiveness, carbon leakage and trade are assessed based on various scenarios of policy design.