The Threat to Free Trade Posed by Climate Change Policy

Jason Bordoff, The Brookings Institution

Abstract

Any unilateral effort by the United States to reduce greenhouse gas emissions by putting a price on carbon raises concerns that it may harm the “competitiveness” of U.S. firms or undermine the measure’s environmental objective by causing carbon “leakage.” One oft-proposed response is to level the carbon playing field by imposing a border adjustment on carbon-intensive imports from countries without comparably effective climate policies. This paper explores the economic and legal implications of border adjustments and argues that their potential harms outweigh whatever small benefits they might provide. As a less harmful alternative, this paper argues for compensating adversely affected firms through the free allocation of allowances based on an ex post showing of harm and assisting workers displaced by a carbon price through such policies as wage insurance, retraining, and job search assistance.