Can Tariffs be Used to Enforce Paris Climate Commitments?

Abstract

We evaluate the potential for using border carbon adjustments (BCAs) and welfare-maximizing tariffs to compel non-compliant countries to meet emissions reduction targets pledged under the Paris Climate Agreement. Our analysis employs a numerical economy-wide model with energy sector detail and, given recent actions by the new US administration, considers BCAs on US exports. We find that BCAs result in small reductions in US emissions and welfare. Consequently, the US is better off when it does not restrict emissions and faces BCAs on its exports than when it implements policies consistent with the Paris Agreement. However, targeted welfare-maximizing tariffs could inflict greater cost on the US than if it complied with its pledged emissions reductions. We conclude that BCAs are an ineffective enforcement mechanism but carefully chosen tariffs could be a mechanism to enforce the Paris Agreement.