​Carbon at the Border – Taxes and Tariffs in a Globalized Economy

By Eva Schliephake, Research Associate at CSF

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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.