DECARBONIZING THE GLOBAL ECONOMY: IS CARBON BORDER ADJUSTMENT AN EFFECTIVE INSTRUMENT?

Abstract

In recent decades, the rising frequency of extreme weather events and their deadly repercussions has prompted an increasing number of governments to explore measures to mitigate the effects of climate change by reducing greenhouse-gas emissions. In the absence of a concerted global effort, many advanced economies have unilaterally implemented carbon-reduction programs that reflect their unique capacities and legislative circumstances. However, these national (or even sub national) carbon dioxide reduction measures have resulted in issues such as carbon leakage and loss of competitiveness. Given this problem, the border carbon adjustments (BCA) mechanism has caught the attention of international policymakers as a viable policy instrument to address the challenges raised by unilateral carbon abatement measures. This paper’s goal is to take into account all the different viewpoints and examine the effects of a BCA implementation comprehensively and exhaustively. In the absence of global environmental cooperation, this research suggests that, notwithstanding its flaws and legal difficulties, BCA is the optimal tool for most industrialized countries with stringent abatement policies. The environmental and economic effectiveness, legal acceptability, and political viability of border adjustment policies depend on their particular design. The value of any BCA design also varies depending on a country's economic and political context. Consequently, the design of BCA should be based on an appraisal of each country's specific conditions and factors. While the bulk of this research explores the BCA from an international viewpoint, Canada is used as a case study to see if the BCA would be a beneficial instrument for a trade-dependent, small, open economy that assumes world import and export prices.