[Published in IAEE Energy Forum (International Association for Energy Economics),
Fourth Quarter, 2013, pp. 15-19]

PUTTING EMISSION LIMITATION ON A SOLID FOUNDATION: WHY EFFECTIVE
INTERNATIONAL COOPERATION NEEDS TO START WITH TRADE ISSUES
Ralph D. Samuelson*
August 2013
Abstract: Effective global action on climate change could start with the unilateral
actions of individual countries, which will be facilitated if trade issues regarding
border carbon adjustments are resolved.

Introduction – The Current DilemmaImagine a world where governments considered themselves unable to require
imported automobiles to meet any air pollution control standards. In this world, airpollution from automobiles could be dealt with only by imposing standards on
domestic carmakers. What outcome might we expect? There are at least two. First, wecould expect the domestic carmakers, and everyone whose livelihood depends onthem, to intensely oppose any air pollution control standards for domestic automobiles.
They would argue, quite sensibly, that such standards would put them at a competitive
disadvantage relative to their foreign competitors. As a result, we could expectpollution control standards for domestic automobiles to be weak. Second, we could
expect many consumers to buy imported automobiles. This may be because, as intoday’s world, they prefer them for various reasons. But in this imaginary world theywould also buy them because by doing so they can avoid the cost of any pollution
control systems required on the domestic automobiles. So only a portion of theautomobile fleet would be subject to air pollution control standards of any kind. For
both reasons, we could expect little progress in controlling air pollution fromautomobiles in this imaginary world.
This system sounds quite absurd, yet it is strikingly similar to the system thatinternational agreements have been seeking to use to control greenhouse gasemissions globally. Under the Kyoto Protocol, 37 wealthier countries and theEuropean Union agreed to limit the greenhouse gas emissions produced in theirterritories over the five-year period 2008–2012, while their consumers remained freeto buy products produced anywhere. The results were predictable. First, there wasintense opposition to the proposed emission limits, and the emission pricing needed to*Ralph D. Samuelson is Vice-President at the Asia Pacific Energy Research Centre in Tokyo, Japan. The opinions
expressed in this article are his own. He may be reached at ralph_samuelson@hotmail.com.

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enforce them, from domestic industries that would suffer competitive disadvantages.
For this reason, the United States never ratified the Protocol, while other countries(they know who they are) never took their obligations very seriously, and even theregions that did implement emission pricing (such as the EU and Australia) adopted
systems which have low emission prices, incomplete coverage, and which face anuncertain future. Meanwhile, consumers in wealthier countries continued to consume
growing amounts of imported products, embedding huge amounts of emissions, fromdeveloping countries (see Davis and Caldeira, 2010). The results were dismal enoughthat a post-2012 successor agreement with binding limits has attracted meager
participation thus far. Little progress is being made.
An Alternative – Action from the ‘Bottom Up’ Rather than the ‘Top Down’
What is happening can be viewed as a classic market failure. Economic principles tellus that markets work when consumers pay the full cost (including environmentalcosts) of the products they consume, and that any departure from this principle
produces ‘market failures’ that give consumers an incentive to behave in ways that are
not in society’s best interests.
Yet under the Kyoto Protocol, with its limits on the territorial emissions in each country,
the consumer has a perverse incentive to avoid paying the environmental costs they
are imposing on society by purchasing products produced in countries with weak or noemission regulation. The outcome is that producers in countries with weak emission
regulation stand to be rewarded in the marketplace, while those in countries witheffective emission regulation stand to be penalized. Production can shift to countries
where emissions remain uncontrolled weakening the impacts of any emission
regulation (‘leakage’), and penalizing the economies of countries implement effectiveemission regulation.
This article will argue that a major step toward effective global action on climatechange is, in principle, quite simple: within a given country domestic and imported
products should compete on a fair basis, especially regarding emission pricing. And
we don’t have to wait for the ever-elusive comprehensive global climate agreement tomake this happen: each country should enforce compliance on imported products attheir own borders with an appropriate border carbon adjustment (Helm, 2012, p. 193194). Once the competitive playing field is levelled between imported products anddomestic products, there would be the beginnings of a politically viable global
emissions control scheme. Policymakers in each country would gain the scope to takeaction, either unilaterally or in concert with other like-minded countries.
Of course, enforcing compliance with emission regulations at borders creates tworisks that should be taken very seriously.
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1. Developing countries fear that border carbon adjustments could be used to shift
the burden of emission reduction from the wealthier countries to them (Böhringer,et al, 2012).
2. There is a general concern that border carbon adjustments could be used as acover for protectionism (Weitzel, et al, 2012).
If these risks are not properly addressed, the outcome could be further setbacks tointernational cooperation on climate change mitigation and/or trade disputes that could
damage the world economy. However, both concerns could be addressed throughproper design of the border carbon adjustments, including internationally agreed-uponrules for their implementation.
Given the lack of progress with the current approach to climate negotiations, a newstrategy is obviously needed. Rather than the current strategy of focusing on acomprehensive global agreement from the ‘top down’, a more promising approach isto build from the bottom-up, starting with agreements that make it more attractive forindividual countries to take unilateral actions. And since trade issues are likely to posethe greatest barriers to unilateral action, international cooperation on climate change
needs to start with trade issues.
Current Barriers to Unilateral Action
Currently any country is free to take a broad range of unilateral actions to reduce theiremissions. Most economists would probably identify putting a price on emissions,such as through a carbon tax or emission trading scheme, as the most important suchaction (Tyson, 2013). Unlike ‘command and control’ regulation, an emissions pricewould impact on the full range of decisions by firms and consumers, and thus produce
the largest reduction in emissions at the lowest cost. Also, a price on emissions would
provide incentives for technology improvements (Aldy and Stavins, 2012). Indeed,
given the size of the emission reductions that will be required to deal with climatechange--50-85% by 2050 compared to the year 2000 being called for by climate
scientists 1 --promoting a ‘low carbon technology revolution’ should probably be themost important goal of international cooperation (Mattoo and Subramanian, p. 50,Helm, p. 213).
Analysis suggests that adopting a unilateral emission price in wealthier countries
should not be economically damaging. For example, an Energy Modeling Forumanalysis (EMF 29) of model results from 12 different expert groups found that to cut
territorial emissions in 2004 by 20% in the Kyoto Annex 1 Regions (including the USA
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See the Intergovernmental Panel on Climate Change (2007), especially Table SPM.6.

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but excluding Russia) would have reduced the GDP of these regions by 0.6% or lessin 11 of the 12 models (Böhringer, et al, 2012, Figure 6). And if the revenues fromemission pricing were used to reduce the income tax, thereby eliminating pre-existingtax distortions, the impact could be significantly less (perhaps even negative) (Parryand Williams, 2010).
So what is the problem?
1. In politics perceptions matter. And policymakers tend to see a unilateral emission
price as something akin to putting a tariff on their own country’s products not facedby their foreign competitors. Basically, they are being put in the perceived positionof having to choose between jobs and economic growth or environmental
protection. As long as the choice has to be framed in these terms, environmental
protection will lose.
2. It is not just a matter of perception. Emission pricing turns the usual politics ofgovernment programs on its head: the benefits (climate protection) are diffuse, but
the costs are concentrated on a few energy-intensive and trade-exposed industries.
And these industries strongly resist.
Given the politics, a ‘race to the bottom’ for weaker emission regulation would seem tobe the natural outcome, and it largely has been. A border carbon adjustment would
directly address these concerns. It would level the competitive playing field, thereby
making unilateral action on climate change more akin to other environmental
regulation that is taken for granted in industrialized countries.
Would a border carbon adjustment actually help to mitigate climate change? Theliterature on this topic is enormous. 2 The conclusions are best described as mixed. For
example, the EMF 29 results from 12 modeling teams suggest that border carbon
adjustments would significantly reduce emission leakage under an emission price, butthey would have only a small favorable impact on emissions and GDP (Böhringer, et al,2012). The EMF 29 results also suggest that border carbon adjustments would
significantly reduce the impacts on energy-intensive and trade-exposed industries,
which, given the politics of emission pricing, may be the most important result.
Addressing Border Carbon Adjustment Design Challenges
How would such a border carbon adjustment scheme work? Clearly there are many
design options, but here is one proposal that might work. We start with the observationthat since the consumer is the key decision-maker in any market, and the one
2A good place to start is the special supplement to Energy Economics, Volume 34, December 2012, devoted to“The Role of Border Carbon Adjustment in Unilateral Climate Policy: Results from EMF 29”.

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ultimately responsible for greenhouse gas emissions, what we should be seeking tocontrol in each country is not emissions from domestic production but emissions
embedded in what is domestically consumed, regardless of where it is produced.
‘Emissions embedded’ refer to the emissions that were caused by the production ofthe product. (see Helm, 2012, p. 189-190).

Figure 1: Example of application of border carbon adjustment assuming both Japanand the United States have a carbon tax.
As shown in Figure 1, for products that are both domestically produced anddomestically consumed, emission pricing could work exactly as it works without bordercarbon adjustments: producers of fuels or other specified emission-intensive primary
products would be required to pay a carbon tax or, under an emission trading scheme,procure emission credits. The cost of the carbon tax or emission credits would then bepassed through automatically in the market to consumers of final products made fromthese inputs.
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Under the framework proposed here importers would also be expected to comply withthe same emission pricing requirements as the domestic products. So if the importing
country has a carbon tax or emissions trading scheme, importers would be required to
pay the carbon tax or procure emission credits for the emissions embedded in theirimported products. And, in order to protect the competitiveness of domestic products
in export markets, exporters would receive a rebate designed to match the emission
pricing incorporated in the cost of their product. This framework for border carbon
adjustments would be similar to today’s value-added taxes, which are also charged on
imports and refunded on exports (Lockwood and Whalley, 2008).
Note that if different countries have different emission pricing schemes, this design
automatically provides coordination between them. Every exported product gets a
rebate of the emission price paid in the country where it is produced and pays theemission price in the country where it is consumed. In the end, every product ischarged the emission price applicable in the country where it is consumed. No
agreements between countries are required for this coordination.
Measuring the Emission Content
But how do we measure the emissions content of these imported and exported
products? To get it exactly right is a hard, perhaps impossible, problem. However, toquote Helm (2012, p. 191), “it is better to be a bit right than exactly wrong”. Withoutborder carbon adjustments, we are essentially assuming that imported products havezero emission content. Anything we do is better than that.
Ideally, we would charge an emission price on each imported product based on its
specific embedded emission content, taking into account the actual fuels and other
inputs used to produce it. This would have the benefit of giving exporting countries an
incentive to reduce the emissions embedded in their products regardless of whether
they have emission pricing. Unfortunately, attempting to base border carbon
adjustments on specific embedded emission content raises two very serious
challenges.
1. Data. The importing country would have difficulty collecting data or conducting
audits in the exporting country, even if the data is available, which it may not be. At
best, the administrative burden for both exporters and importing country
governments would be large (see Perrson, 2010)
2. Impact on developing countries. Border carbon adjustments based on the specificembedded emission content of the imports would be what Mattoo andSubramanian (2013, p. 24) refer to as the “nuclear option” in terms of its tradeconsequences for developing countries. The reason is that many developing6

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countries have much more emission intensive production processes than thewealthier countries. For example, Mattoo and Subramanian estimate that a bordercarbon adjustment based on actual emission content imposed by the wealthiercountries could reduce the exports of China and India by 20 per cent. This
assumes the wealthier countries adopt an emission price which allows them to cut
their emissions by 17 per cent by 2020 compared to 2005 levels.
An alternative approach that would address both challenges would be to charge anemission price on imported products based on the estimated embedded emissions ofsimilar domestic products. This approach should change the competitive landscapevery little compared to a world without emission pricing; Mattoo and Subramanian(Table 5-4) estimate the result would be about a two per cent reduction in China andIndia’s exports. Tables of the emission content for various classes of products could
be applied by customs authorities based on model results, thereby minimizing theadministrative burden for business.
The framework outlined here should address both risks of border carbon adjustments
discussed above. First, since it would change the competitive landscape very little, itdoes not shift the burden of emission reduction from the wealthier countries to thedeveloping countries. Second, it is clearly not protectionist; indeed, as Helm (2013, p.
191) points out, not to have emission pricing is a trade distortion, since it represents
the subsidizing of polluting exports.
The Happy Ending: Facilitating International Cooperation
Policymakers in the wealthier countries should find this framework to be a step in theright direction, since it would allow them to use the most powerful of tool for reducing
emissions—emission pricing—without being perceived as undermining their owneconomy. And policymakers in the developing countries, who are probably more
exposed to damage from climate change than the wealthier countries (see Mattoo andSubramanian, pp. 15-16), should like it, too, for at least three reasons.
1. At little cost to developing countries, it would give the wealthier countries the tool to
do what the developing countries have been demanding of them: effective action toreduce emissions.
2. By focusing on consumption rather than production, it would (quite properly) shift
more of the responsibility for emissions to the wealthier countries.
3. The developing countries will ultimately also need emission pricing if the world is tomeet the challenges of climate change and developing country policymakers, too,
will want to avoid being perceived as undermining their own economies.
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But aside from facilitating unilateral actions, border carbon adjustments can also lay
the groundwork for wider international cooperation on climate change. Once there are
effective emission measurement and control regimes in place in many countries,
pledges to reduce emissions can become credible, their implementation can become
transparent to all, and there is little risk to the pledger in making them legally
enforceable. Now all kinds of deals become feasible; these include the Kyoto-style “I’llreduce my emissions if you reduce yours”, international emissions trading, or emission
reductions in return for some type of assistance. Effective global action would finallybe possible.

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