Carbon Border Adjustments, Climate Clubs, and Subsidy Races When Climate Policies Vary
AbstractJurisdictions adopt climate policies that vary in terms of both ambition and policy approach, with some pricing carbon and others subsidizing clean production. We distinguish two types of policy spillovers from these diverse approaches. First, when countries have different levels of climate ambition, free-riders benefit at the expense of more committed countries. Second, when countries pursue different approaches, carbon-intensive producers within cost-imposing jurisdictions are at a relative competitive disadvantage compared with producers in subsidizing jurisdictions. Carbon border adjustments and climate clubs respond to these spillovers, but when countries have divergent approaches, one policy alone cannot address both spillovers. We also consider the policy dynamics arising from carbon border adjustments and climate clubs; both have the potential to encourage upward harmonization of climate policy, but come with risks. Further, the pressures of international competition may result in subsidy races, with attendant risks and benefits.
CitationClausing, Kimberly A., and Catherine Wolfram. 2023. "Carbon Border Adjustments, Climate Clubs, and Subsidy Races When Climate Policies Vary." Journal of Economic Perspectives, 37 (3): 137-62. DOI: 10.1257/jep.37.3.137
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- O13 Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
- Q51 Valuation of Environmental Effects
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy