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Using a multi-region and multi-sector computable general equilibrium model, this paper evaluates the border adjustment policies of carbon regulations in Japan. We consider five types of border adjustments and examine their effects on the welfare, carbon leakage, and competitiveness of the Japanese energy-intensive trade-exposed (EITE) sectors.

Our analysis shows that no single border adjustment policy is superior to the other policies in terms of simultaneously solving three primary issues: Welfare degradation, carbon leakage, and a loss of competitiveness in the EITE sectors. In addition, we show that export border adjustments are effective at restoring the competitiveness of Japanese exporters and reducing leakage. Our analysis also reveals that border adjustment in Japan significantly affects carbon leakage to China and the competitiveness of the iron and steel sectors. Finally, we show that border adjustments with and without consideration of indirect emissions have similar impacts, which indicates that the information regarding direct emissions is sufficient for implementing border adjustment in Japan.

We report simulation results for alternative multilateral emissions cuts and accompanying policies which could come under renewed reconsideration for the process to follow the Durban UNFCCC negotiations. The model is an Armington type trade model extended to capture climate change. We calibrate the model to alternative BAU damage scenarios following the Stern report and the literature that has followed. We consider different depths, forms, and timeframes for emission reductions by China, India, Russia, Brazil, US, EU, Japan, and a residual row both jointly and block wise. We assume regionally uniform percentage of both climate change and damages by region, which are relaxed later in sensitivity analysis. The welfare impacts of both emission reductions and accompanying measures are computed in Hicksian money metric equivalent form over three alternative potential commitment periods: 2012–2020, 2012–2030, and 2012–2050. Our multiyear multicounty global modeling framework captures the benefit of emission mitigation through preferences incorporating temperature change. Countries are linked not only through shared welfare impacts of global temperature change but also through trade among country subscripted goods. These trade impacts influence net country benefits from alternative emission reduction agreements. We also evaluate the potential impacts of potential accompanying mechanisms including funds/transfers, border adjustments, and tariffs.

In the post-Paris Agreement era, the number of carbon pricing initiatives in order to combat climate change grows continuously. However, carbon prices vary substantially among countries which yields negative drawbacks in terms of carbon leakage and loss of competitiveness for firms producing in countries with more stringent regulations. Border adjustments (BAs) could help tackle these negative drawbacks through harmonizing carbon prices across countries. We model a two-stage game where Country A can choose whether to implement BAs in the first stage. In the second stage, producers from both countries compete over prices in Bertrand competition or over quantities in Cournot competition. Most analyses on BAs so far focus on carbon pricing in the form of carbon taxes. However, we observe that many governments achieve their mitigation targets by implementing a cap and trade system with some kind of free allocation of emission allowances. From the current global carbon pricing situation, we identify two conditions for the compliance with the WTO’s national treatment principle that have not been dealt with in detail in previous models: (i) the application of BAs in the form of a cap and trade system and (ii) accounting for free allocation of emission allowances. Our results show that irrespective of the competition type, BAs supplementing a cap and trade system with free allocation improve welfare if the competitive pressure is high.

This chapter describes how economic models are used to answer questions about policy changes, specifically in the context of a carbon fee-and-dividend system. A carbon fee-and-dividend is a price on carbon dioxide emissions that returns the revenues gained to ordinary households in the form of a monthly check. The chapter describes, in nontechnical terms, the economic models and modeling processes involved and how they are similar and different from climate models…