Hitotsubashi Institute for Advanced Study


Border Carbon Adjustments with Endogenous Assembly Locations


In this study, we develop a two-country model to examine whether border carbon adjustments (BCAs) are more effective than emission tax alone in preventing carbon leakage and decreasing global emissions with endogenous assembly locations. Specifically, we explore three policy regimes: i) emission taxes alone (no BCAs), ii) emission taxes and carbon-content tariffs (partial BCAs), and iii) emission taxes, carbon-content tariffs, and tax rebates on exports (full BCAs). We find that the effectiveness of BCAs depends on whether BCAs induce assembly relocation. If assembly relocation does not occur, BCAs prevent carbon leakage and decrease global emissions. However, if BCAs induce assembly relocation, carbon leakage may occur with partial BCAs, and global emissions may be higher with full BCAs.

Report No.: HIAS-E-111
Author(s): Haitao Cheng (a)
Affiliation: (a) Hitotsubashi Institute for Advanced Study, Hitotsubashi University
Issued Date: This version: August 2021
Keywords: Abatement Investments; Border Carbon Adjustments; Carbon Leakage; Endogenous
Assembly Locations; International Oligopoly
JEL: F18; H23; Q54