Trade, climate change, and the political game theory of border carbon adjustments

Trade, climate change, and the political game theory of border carbon adjustments / Dieter Helm, Cameron Hepburn and Giovanni Ruta. Oxford Review of Economic Policy, Vol 28 n°2, Summer 2012

The lack of real progress at the Durban climate change conference in 2011— postponing effective action until at least 2020—has many causes, one of which is the failure to  address trade issues and in particular carbon leakage. This paper advances two arguments. First, it argues that the conventional view of Border Carbon Adjustments  (BCAs) as a “dirty” trade barrier should be turned on its head. Rather, the absence of a carbon  price comprises an implicit subsidy to dirtier production in non-regulated markets. Second, BCAs  could act as a game-changer when climate policy negotiations move at a glacial pace, if at all. Materially stronger  progress could be achieved indirectly from the threat of unilateral trade policies. The paper shows  how this could come about, using a simple political game theory model. The appropriate game form is  one in which parties move unilaterally and sequentially, given the failure to agree on a common course of  action, and are fully aware of the impacts of their actions. The paper shows that properly crafted  BCAs could help reduce trade distortions, limit the competiveness effects, and help build a broader coalition of interests for more global  actions. (© Helm,  Hepburn and Ruta)

–> Draft :

Centre for Climate Change Economics and Policy, Working Paper No. 92 ; Grantham Research Institute on Climate Change and the Environment, Working Paper No. 80, , May 2012

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