Carbon at the Border – Taxes and Tariffs in a Globalized Economy
Summary by Eva Schliephake, Research Associate at CSF
Ongoing Research in joint work with Hendrik Hakenes, University of Bonn
Carbon pricing has become a defining instrument of climate policy. While some countries have embraced carbon taxes and emissions trading, others have not. The result is a fragmented global landscape confronting policymakers with a basic dilemma: how should a single jurisdiction optimally price a global externality when other countries remain on the sidelines?
Our study tackles this question by analyzing how carbon pricing within a country reshapes production decisions, household consumption, labour supply and cross-border investment flows. We develop a general equilibrium framework in which a “green” country seeks to internalise the climate externality while the rest of the world does not. We allow carbon to be priced not only in production, but also in consumption, investment and “at the border”— mirroring real-world tools such as emissions trading systems and carbon border adjustment mechanisms.
Our findings offer a more nuanced view of how unilateral carbon pricing operates in an open economy. A unilateral carbon tax on domestic producers alone is insufficient. The optimal policy spreads carbon pricing across production, consumption and investment, aligning each tax with its contribution to emissions.
Border adjustments play a role — but not the role often claimed. Full border protection shields domestic workers while burdening domestic consumers; no border adjustment does the opposite. The optimal regime shares the burden across workers, consumers and investors rather than concentrating it on one group.
The policy message is straightforward. Carbon cannot be priced only at the smokestack. Effective climate policy in a fragmented world requires a coordinated carbon pricing strategy: emissions trading for domestic production, border adjustments for traded goods and measures that discourage carbon-intensive investment at home and abroad. Partial measures merely shift rents and political resistance across constituencies.
