Embodied Carbon Tariffs

• Author: Christoph Böhringer,Thomas F. Rutherford,Jared C. Carbone
• DOI: http://doi.org/10.1111/sjoe.12211
• Published date: 01 January 2018
• Date: 01 January 2018

©The editors of The Scandinavian Journal of Economics 2016.

Scand. J. of Economics 120(1), 183–210, 2018

DOI: 10.1111/sjoe.12211

Embodied Carbon Tariffs*

Christoph B¨ohringer

University of Oldenburg, DE-26111 Oldenburg, Germany

christoph.boehringer@uni-oldenburg.de

Jared C. Carbone

Colorado School of Mines, Golden, CO 80401, USA

jcarbone@mines.edu

Thomas F. Rutherford

University of Wisconsin, Madison, WI 53706, USA

rutherford@aae.wisc.edu

Abstract

In this paper, we investigate the economic and environmental impacts of tariffs on carbon

embodied in trade. We find that carbon tariffs do reduce foreign emissions, but their

ability to improve global cost-effectiveness of unilateral climate policy is quite limited –

even if tariff rates are based on more sophisticated second-best considerations. If carbon

tariffs are levied on the full carbon content of traded goods, they can even increase rather

than decrease the global cost of emission reduction. The main effect of carbon tariffs is

to shift the economic burden of developed-world climate policies to the developing world.

Keywords: Carbon leakage; carbon tariffs; computable general equilibrium

JEL classification:D58; Q58

I. Introduction

In a world where the likelihood of a stringent global agreement to control

greenhouse gas emissions seems small, the idea of using trade policy as

a form of indirect regulation of foreign emission sources has gained

many supporters in regions considering unilateral climate policies. One

popular proposal involves the taxation of carbon emissions embodied in

imported goods – an instrument we refer to in this paper as an embodied

carbon tariff. Under such a scheme, for example, imported steel from

countries without domestic carbon controls would face a tax based on

direct emissions (those due to the combustion of fossil energy in steel

*Research funding is g ratefully acknowledged from Environment Canada and the Stiftung

Mercator (ZentraClim). The ideas expressed here remain those of the authors, who remain

solely responsible for errors and omissions.

184 Embodied carbon tariffs

production) as well as indirect emissions (such as emissions created by

the generation of electricity for use in steel production).

The intuitive appeal of embodied carbon tariffs to those concerned

about climate change is clear: when emissions from domestic production

activities are priced unilaterally, the global environmental impact will be

undermined to the extent that emissions increase elsewhere. This effect

is known as carbon leakage. Advocates of consumption-based emission

policies (including embodied carbon tariffs) argue that regulating emissions

in domestic production also fails to account for other emissions a country

is “responsible for” if its citizens consume imported goods with embodied

emissions. Embodied carbon tariffs might provide a way for climate-

concerned nations to reduce carbon leakage and regulate the emissions

embodied in imported consumption goods. Taxation of embodied carbon

is also attractive from a political economy perspective: embodied carbon

tariffs ensure that the production of emission-intensive goods cannot easily

avoid regulation by relocating abroad, ameliorating concerns about the loss

of competitiveness in domestic industries due to unilateral climate policy.

All of these arguments have contributed to the popularity of climate

policy initiatives that seek to regulate emissions embodied in consumption

activities. Examples include California’s low-carbon fuel standard (LCFS),

the proposed United States federal LCFS, and the discussion of carbon

tariffs in several OECD countries.

Advocates of embodied carbon policies cite the results of engineering

studies based on life-cycle analysis – specifically, multi-regional input–

output (MRIO) studies – which calculate carbon emissions embodied in

production, consumption, and trade throughout the world economy. The

calculations show that the developed world is, on average, a large net

importer of embodied emissions from developing countries and has been

becoming more so over time (Weber and Matthews, 2007; Peters and

Hertwich, 2008a, 2008b, 2008c). Furthermore, a substantial amount of

the emissions embodied in traded goods is not due to the combustion of

fossil energy inputs used directly in their production. For example, much of

the emissions embodied in manufactured goods stems from electricity use,

where the combustion of fossil fuels in electricity generation is the primary

source of the emissions in the supply chain. Supporters of embodied

carbon tariffs argue, therefore, that this instrument could substantially

extend the reach of unilateral developed-world climate policies – by

covering foreign sources of emissions and also by covering indirect sources

of emissions.

While embodied carbon tariffs have intuitive appeal, a more thorough

economic impact assessment casts doubts on their ultimate desirability. In

this paper, we use a large-scale computable general equilibrium (CGE)

model of global trade and energy use to quantify the economic and

©The editors of The Scandinavian Journal of Economics 2016.