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Unpublished Paper
International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns
Prepared for Brookings Forum: "Climate Change, Trade and Competitiveness: Is a Collision Inevitable?" (2008)
  • Jason Bordoff
Abstract
Any unilateral effort by the United States to reduce greenhouse gas emissions by putting a price on carbon, such as a cap-and-trade system, 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, such as a requirement to purchase emission allowances, on carbon-intensive imports from countries without a comparably effective climate policy. This paper weighs the expected benefits of border adjustments against their potential harms. It notes that a border adjustment on carbon-intensive imports from certain countries, such as that proposed in the Lieberman-Warner Climate Security Act, would do little to reduce the small amount of carbon leakage, though it would protect a few specific carbon-intensive domestic industries. At the same time, there is a risk that border adjustments would be abused for purely protectionist reasons, lead to retaliatory tit-for-tat trade wars, or be ruled WTO noncompliant. The paper focuses on this last concern about the consistency of border measures with international trade law and particularly on how that analysis should be informed by the economics of a cap-and-trade system. While the outcome of any complex legal question is difficult to predict, the paper identifies several ways in which a border adjustment on carbon-intensive imports from countries without comparably effective climate policies may be inconsistent with WTO law. As an alternative, some have proposed the use of free allocation of allowances to compensate adversely affected industries. The paper finds such measures, depending on how they are designed, may be more likely to be WTO compliant, though only to the extent that they are mostly ineffective in protecting employment and output in adversely affected industries. The paper concludes that the expected costs from both border adjustments and free allocation likely outweigh the benefits, and suggests alternative mechanisms to address climate change while mitigating leakage and adverse impacts on workers in carbon-intensive sectors.
Keywords
  • Climate Change,
  • Trade,
  • Competitiveness,
  • Cap-and-Trade
Disciplines
Publication Date
June, 2008
Citation Information
Jason Bordoff. "International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns" Prepared for Brookings Forum: "Climate Change, Trade and Competitiveness: Is a Collision Inevitable?" (2008)
Available at: http://works.bepress.com/jason_bordoff/16/