Climate Change and the Global Trading System: On the Advantages of a Carbon Tariff

The European Union has been a pioneer in climate change policies, especially through its "cap and trade" emissions trading system (the ETS) for reducing greenhouse gas emissions by 20 percent by the year 2020. This book analyzes the economic consequences of supplementing the ETS with an import tax on the CO2 content of all goods imported into the EU.The authors find that a CO2 border tax or import tariff would increase global welfare and that it can probably be made to be WTO-compatible. Moreover, given the increasing ability to measure a product's carbon footprint, there are no insurmountable, practical obstacles to introducing such a tariff. Such a tariff might not be appropriate, however, if developing countries live up to their obligations of differentiated responsibilities and capabilities spelled out under the United Nations Framework Convention on Climate Change. Whether this will be the case is not yet clear.