Editor's Overview

Global climate change has leapt to the forefront of the public conscience. As policymakers grapple with the challenge of shaping policy to achieve a domestic and international consensus, attention has turned to the role that trade- related measures could play. In both Europe and the United States, policymakers have considered implementing so- called border adjustments on goods coming from countries with few or no climate change policies. These policymakers argue that such measures would protect domestic firms from “unfair” competition abroad and provide a stick to discipline laggard countries into implementing their own climate change policies.

Although this “negative” agenda of trade- as- stick has garnered most of the attention in policy debates, a “positive” agenda at the nexus of trade and climate change will be central in addressing the challenges posed by climate change. Trade and investment flows will help spread the technology necessary for climate change mitigation and adaptation and provide the financing for necessary investments. And as policymakers strive toward a post-2012 climate change framework, the success of the trading system in building a relatively successful international institution might provide lessons for the climate change system.

Because new climate change policies will likely be developed and implemented in the next few years, it is important to understand the relationship between climate change and the trading system, particularly whether it is desirable to include trade- related measures in climate change policies. To that end, practitioners, academics, and policymakers convened in Washington on June 9, 2008, to discuss these matters at a conference on climate change, trade, and competitiveness hosted by the Brookings Institution.

The chapters in this volume are revised versions of the papers presented at this conference. Each chapter is followed by one or more comments offered by the discussants at the conference. In chapter 1, Warwick McKibbin and Peter Wilcoxen examine the size and effects of border adjustments that would be needed to level the playing field if a carbon tax (or a carbon tax equivalent, like a cap- and- trade program) were put in place. Using their G- Cubed model of the world economy, they consider the effects of imposing carbon taxes both with and without border adjustments. In their model, the border adjustment is based on the carbon emissions associated with the production of each imported product, and the goal of the adjustment is to match the cost increase that would have occurred had the exporting country adopted a climate policy similar to that of the importing country. They analyze two cases. First, they examine what would happen if Europe imposed a carbon tax and then implemented a border adjustment based on U.S. energy intensities. In the second case, they examine what would happen if the United States imposed a carbon tax and then implemented a border adjustment based on Chinese energy intensities. In both cases, they find that the tariffs would be very small on most traded goods, would economically harm the countries imposing them, and would produce little in the way of environmental benefits.

In chapter 2, Jason Bordoff combines economic and legal analysis to weigh the expected benefits of border adjustments against their potential harms. Consistent with the analysis in chapter 1, he argues that a border adjustment on carbon- intensive imports from certain countries, such as that proposed in the Lieberman- Warner Climate Security Act, would do little to reduce the small amount of carbon leakage, although it would protect a few specific carbonintensive domestic industries. He points out that there is also a risk that border adjustments would be abused for purely protectionist reasons, lead to retaliatory tit- for- tat trade wars, or be ruled noncompliant with the World Trade Organization (WTO). Though the outcome of any complex legal question is difficult to predict, Bordoff identifies several ways in which a border adjustment on carbon- intensive imports from countries without comparably effective climate policies could be inconsistent with WTO law. He also looks at the free allocation of allowances to compensate adversely affected industries and finds that such measures are more likely to be compliant with WTO law only to the extent that they are mostly...