Border Adjustments for Economywide Policies That Impose a Price on Greenhouse Gas Emissions

by Sabrina I. Pacifici on December 19, 2013

“Human activities around the world are producing increasingly large quantities of greenhouse gases (GHGs), the most abundant of which is carbon dioxide (CO2). In recent years, concerns about the effects those emissions might have on the climate have prompted the Congress, federal regulators, and others to consider policies to reduce them. This CBO report examines the unintended effects on the competitiveness of U.S firms of an economywide policy, such as a carbon tax or a cap-and-trade program, that would reduce emissions by imposing a price on them. The report also assesses the use of border adjustments, such as import tariffs and export subsidies, and transition assistance to mitigate those unintended effects. Border adjustments could reduce the loss of competitiveness and make the costs of U.S. producers more similar to those of producers in countries that do not impose comparable policies, but such adjustments could be difficult to implement and to defend if challenged as being inconsistent with the General Agreement on Tariffs and Trade (GATT), one of the component agreements of the World Trade Organization (WTO). Transition assistance could also offset the loss of competitiveness and would probably be easier to implement but might engender difficulties under WTO agreements as well.”

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