damage would have to be close to 50%.<sup>22</sup> In a follow-up, Tian and Whalley (2010), estimate that transfers of 150$ billion per year would compensate the BRICS for their participation in an across-the-board reduction in emissions of 30% over a fifty-year period.

Carbon taxes to reduce emissions will lead to a shift from tradables towards nontradables as the latter are less energy-intensive. For example, Pigott et al. (1992) estimate that a reduction of CO2 emissions of 80% of their 1990 level across regions would reduce world trade by 50%, suggesting an elasticity of trade to CO2 of (minus) two-thirds. Factoring in the greater substitution possibilities across energy sources in the longer term, a guess-estimate would be that a 10% reduction in CO2 emissions could result in a 3% reduction in world trade. In practice, not all countries will apply carbon pricing. A typical model estimate is that, in the absence of a border tax adjustment (BTA), estimated leakage rates are in the 10%-20% range. For example, if the EU (or the US) were to cut emissions individually by 20%, the leakage rate would be around 35% but it is only 20% when both cut emissions together (Boehringer et al. 2010).

MR-GE models have also been used to provide estimates of the effects of border tax adjustments (BTAs) to prevent carbon leakage. The estimates suggest that a BTA reduces leakage by half. The reason for the relative inefficiency of a BTA is that a tax on the CO2 content of imports has a strong terms-of-trade effect in favor of the country that imposes the BTA, leading to a change in comparative advantage.

The models also give estimates of the different BTAs that have been proposed in the political debate. A first proposal circulated in the US would be to adjust the price of imports by applying the CO2 tax in the US to the total (direct and indirect) carbon content of imports, perhaps along with a relief from paying the tax for exporters. A second proposal would be to tax imports on the basis of the carbon content of imports (US legislation would oblige importers to buy emission allowances equivalent to the carbon content of imports). Mattoo et al. (2009), estimate that if industrial countries were to reduce emissions by 17% without applying a BTA, manufacturing exports by developing countries would remain unchanged but would fall by about 2% under the first proposal, and by 15% under the second proposal. Should developed countries try to impose across-the-board taxation on imports based on their carbon content, there would be a collision between developed and developing countries at the WTO.

- **5 Implementation Difficulties: Political Economy Considerations**

It is estimated that a tax of $100 per ton of CO2 would be necessary to keep any global temperature rise to around 2<sup>0</sup> C generating annual rents close to a trillion dollars and that the annual fossil fuel subsidies that should be eliminated are over $400 billion. These estimates are of an order of magnitude never seen in the international system. Acting on both measures continues to face strong opposition and any serious action against climate change will have to face up to contestable rents far beyond those that have ever been at stake in the world trading system. The failed negotiations to deal with fishery subsidies and climate change show the inadequacy of the current subsidy

> 22 Most models show that a reduction of CO2 emissions of 50% would reduce GDP by 2-3%.

18