WORKINGPAPER

22-14HowCarbonTariffsandClimate

ClubsCanSlowGlobalWarming

ShantayananDevarajan,DelfinS.Go,ShermanRobinson,andKarenThierfelder

September2022

ABSTRACT

Slowingglobalwarmingrequirescountriestoreducecarbonemissions,whichimposescostsontheireconomies.Tobeeffective,mostcountriesmustagreecollectivelytoparticipate(e.g.,theParisAgreement,COP26).However,everycountryhasanincentivenottocomplyandstillreapthebenefitsofothercountries’actions—aclassicfree-riderproblem.Thispaperevaluatesrecentrecommendationstousetradepolicytosolvethefree-riderproblemassociatedwithclimatemitigationstrategies.ItshowsthattheEuropeanUnion’scarbonborderadjustmentmechanism(CBAMtariffs)areeffectiveatoffsettingtheunfaircompetitiveadvantageofnoncompliantcountriesinthemarketsofcompliantcountriesbuthavelittleeffectonthetradeofnoncompliantcountries,whocandiverttradetoothernoncompliers.CBAMtariffsalonehavelittleimpactonglobalCO2emissions.Thepaperalsoexamines“climateclubs”(coalitionsofcountriesthatagreetoimposecarbontaxesorotherequivalentpoliciesandimposepunitivetariffsonnon-clubmemberstoinducethemtojointheclub).Itfindsthatpunitiveclimateclubtariffscanbeeffectiveininflictingsignificantdamageontheeconomiesofnonmembers,providingastrongincentiveforthemtojointheclub.Thepaperidentifiestradedependencebetweenclubandnon-clubmembersasanimportantconsiderationforthesuccessofaclimateclub.Clubmembersthatarestronglylinkedtonon-clubmemberssufferlosseswhentheclubpunishesnon-clubmembers,whichwouldmakethemhesitanttoimposepunitivetariffsonamajornonmembertradingpartner.

JELCodes:F18,C68,Q54,Q43

Keywords:carbontaxes,greenhousegas(GHG)emissions,climateclubs,carbontariffs,carbonborderadjustmentmechanism(CBAM),computablegeneralequilibrium(CGE)models,tradedependence.

ShantayananDevarajanis

professorofthepracticeof

internationaldevelopment

attheEdmundA.Walsh

SchoolofForeignService,

GeorgetownUniversity.

DelfinS.Goisaformerlead

economist(retired)atthe

WorldBank.

ShermanRobinson

isa

nonresidentseniorfellow

atthePetersonInstitutefor

InternationalEconomics.

KarenThierfelderisprofessor

ofeconomicsattheUnited

StatesNavalAcademy.

Note:Theviewsinthispaper

arethoseoftheauthors

andnottheirinstitutions.

Forhelpfulcomments,the

authorsthankparticipantsin

thesession,“ClimateChange

Policy”attheGlobalTrade

AnalysisProject(GTAP)25th

AnnualConferenceonJune

8–10,2022;participantsatthe

USDA/ERSPolicyModelling

GroupseminaronJune28,

2022;andChadP.Bown,

StevenFries,EgorGornostay,

andMarcusNoland.

1750MassachusettsAvenue,NW|Washington,DC20036-1903USA|+1.202.328.9000|

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1SeeEC(2022).

INTRODUCTION

Climatechangecausedbyincreasedlevelsofgreenhousegases(GHGs)is

heatingtheglobeandhascreatedextremeweatherevents(droughts,floods,and

fires)andmeltingiceintheArcticandAntarctica.TheIntergovernmentalPanel

onClimateChange(IPCC2022)warnsthatifglobaltemperaturesrisemorethan

1.5to2.0degreesCelsiusabovepreindustriallevels,theeffectsontheplanet

couldbecatastrophic.

MitigatingclimatechangebycurbingGHGemissionsisthereforeaglobal

publicgood.Themostefficientinstrumentforcurbingemissionsisauniversally

adoptedcarbontax,whichincentivizeshouseholdsandproducerstosubstitute

awayfromfossilfuels,themajorsourceofGHGemissions(IMF2019).Thereare

otherlessefficientnontaxpoliciesthatcanachievethesamereductionincarbon

emissionsandsocomplywiththegoalsof,forexample,theParisAgreement.

However,everycountryhasanincentivenottocomplyandstillreapthebenefits

oftheactionsofcompliantcountries—aclassicfree-riderproblem.Thispaper

evaluatesrecentrecommendationstousetradepolicytosolvethefree-rider

problemassociatedwithclimatemitigationstrategies.

Manycountries,includingthemembersoftheEuropeanUnion(EU),have

introducedcarbontaxesandothermeasurestolimitGHGemissions.These

measuresgivenoncompliantcountriesanunfaircompetitiveadvantagein

trade,becausetheirproducershavelowercostsandcansellexportsatlower

prices.Toleveltheplayingfield,inMarch2022,theEuropeanUnionagreedin

principletoimposetariffsonimportsfromnoncompliantcountriesbasedon

theircarboncontent,throughitscarbonborderadjustmentmechanism(CBAM).1

Themagnitudeofthetariffwillbecountry-andcommodity-specific,starting

withgoodsinfivesectors(cement,ironandsteel,aluminum,fertilizers,and

electricity)withhighcarbondioxide(CO2)emissionsintheirproduction.

Tradepolicyinstrumentscanalsobeusedmorebroadlytopunishfree-rider

countries(or“holdouts”)fornotparticipatingintheglobalefforttomitigate

climatechange.Thegoalistoinducethemtodecarbonizetheireconomies

inlinewithcompliantcountries.Nordhaus(2015)coinedthetermc/imate

c/ubtodescribecoalitionsofcompliantcountriesthatcancollectivelypunish

noncompliantcountriesbyraisingtariffsonallimportsfromnonmembers.Unlike

CBAMtariffs,theclimateclubapproachdoesnotbasethetariffsonthecarbon

contentofproductionofnon-clubmembers.

TheCBAMandclimateclubshavedifferentgoals.CBAMtariffsaredesigned

toprotectdomesticmarketsincountriesinstitutingclimatepoliciesfromunfair

competitionfromcountriesthatdonot;theCBAMisnotexplicitlydesignedto

inducenoncompliantcountriestoadopteffectivecarbonreductionpolicies.In

contrast,climateclubsareexplicitlydesignedtopunishnoncompliantcountries

inordertoinducethemtojointheclub.

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PURPOSEANDSTRUCTUREOFTHEPAPER

Thispaperpresentsasimulationmodeloftheglobaltradingsystem,inorder

toexaminetheeffectivenessoftradepolicylinkedtoclimatepolicy.Toprovide

abenchmarkforcomparison,themodelusesacarbontaxastheinstrumentto

reduceCO2emissionsinallcompliantcountries.First,itexploreshoweffective

CBAMtariffsareincorrectingfortheunfaircompetitiveadvantageofnontaxers

andreducingglobalcarbonemissions.ItfindsthatCBAMtariffsareeffective

inoffsettingtheunfaircompetitiveadvantageofnontaxersinthemarketsof

compliantcountriesbuthavelittleeffectonnontaxers’trade,whichtheycan

diverttoothernontaxingcountries.Inaddition,thetariffsareappliedonlytothe

fivedirtysectorsdescribedintheCBAMproposal.Asaresult,CBAMtariffshave

littleimpactonglobalCO2emissions.

Second,thepaperexaminestheimpactofaclimateclubinpunishing

nontaxcountriesthataremajorsourcesofGHGemissions.Itfindsthatpunitive

climate-clubtariffsinflictsignificantdamageontheeconomiesofnonmembers,

whichsufferefficiencylossesandlowerexportprices.Iftheclimateclubis

large,nonmemberscannotevadetheimpactbydivertingtrade.Inaddition,

therevenuefrompunitivetariffsaccruestotheclubmembers,reducingthe

exportearningsoftheholdoutcountries.Thelostexportearningsmayprovide

additionalmotivationforholdoutstojointheclub—anaspectofclimateclubs

notrecognizedintheliterature.

Thepapershowsthatthesuccessofaclimateclubdependsonthelevelof

tradedependency.Whenmembersaredependentontradewithnonmembers,

theysufferwhenpunitivetariffsareimposedonthelinkednonmembers.For

example,ifMexicoandCanadaareclubmembersandtheUnitedStatesisnot,

anypunitiveclubtariffsagainsttheUnitedStateswillhurtMexicoandCanada.

Suchtradedependenciescomplicateanygame-theoreticanalysisbecause

thepunitivetariffswilldamagelinkedclubmembers,possiblydestabilizing

thecoalition.Suchtradelinkagesmightrequiretransferpoliciesamongclub

memberstocompensatelosers.

THELITERATUREONTRADEPOLICYANDCLIMATECHANGE

Anextensivebodyofliteratureexploresthelinksbetweentradepolicyand

climatechange.Thisliteraturecanbedividedintotwobroadstrands.Thefirst

examinestheuseofCBAMtariffsbyacountrythathasacarbontaxinorderto

leveltheplayingfieldwithcountriesthatdonotimposecarbontaxes.Thenontax

countrieseffectivelysubsidizetheirexports,providingacompetitiveadvantage

againstcarbontaxcountries.

Thesecondstrandexaminestheuseoftradepolicytoinducecountriesto

participateinaglobalcarbontaxpolicy.Itshowsthataclimateclubofcarbon-

taxingcountriescanenforcetheuseofcarbontaxesbyimposingcostson

nonmembers,encouragingthemtobecomeclubmembers.

TheCarbonBorderAdjustmentMechanism

Tosupportitseffortstoreduceglobalcarbonemissions,in2021theEuropean

UnionproposedtheCBAM(EC2021),agreedtodoitin2022,buthasnotyet

implementedit.Underthismechanism,theEuropeanUnionwilltaximports

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toensurethatdomesticandimportedgoodsfacethesametaxonthecarbon

embodiedinproduction.Forregionswithoutadomestictaxoncarbon,tariffs

willbebasedontheCO2emittedinproductionintheexportingregion.2

Ataxondirtyimportsbasedontheircarboncontentisnotanewidea.

Earlierstudiesofsimilarproposals—alsocalledabordercarbonadjustment

tax—reportmixedresults.B?hringer,Baliestreri,andRutherford(2012a)find

thatbordercarbontaxescaneffectivelycurbcarbonleakageandoffset

competitivenesslossesbuthavemodesteffectsonreducingglobalcarbon

emissionsorincreasingtheefficiencyofmeetingabatementtargets.3McKibbin

etal.(2018)andMcKibbinandWilcoxen(2009)findthatcarbondutiesbythe

UnitedStatesandtheEuropeanUnionarecomplicatedtoimplementandhave

negligibleeffectsontradeandcarbonemissions.

B?hringeretal.(2022)suggestthatbordercarbonadjustmenttaxeswill

bedifficulttoimplement.Althoughtheymaycomplywithinternationallaw,

implementingthemfacespracticalchallenges,suchasthecostofadministering

thetaxandenforcingfirms’compliance.4Theynotethatbordercarbon

adjustmenttaxes(a)createincentivesforexporterstosendgoodsproduced

withdirtytechnologytoregionswithoutabordercarbonadjustment;(b)may

havelittleeffectonnoncompliantregionsifitiseasytotradedivert;(c)maynot

inducenoncompliantregionstoadoptacarbontax,becausetraderepresentsa

smallshareoftotalproduction;(d)mayleadtotradewars;and(e)mayreduce

globalcooperationeffortsonclimatechange.KrugmannotesthattheCBAM

concernsonlycarbonembodiedintrade,ignoringthemuchlargervolumeof

carbonembodiedinproductionforthedomesticmarket.5

Anotherissueishowtocalculatethecarbontariff.Mattooetal.(2009)

considerthecomputationofborderadjustmenttaxesbasedontheCO2

emissionsindevelopedcountriesthathavecarbontaxesandmayhavealready

implementedothertaxesversustheCO2fromdirtierproductionindeveloping

countries.Theyfindthattheformerapproachlevelstheplayingfieldfor

producersindevelopedcountrieswithacarbontaxbutlimitsthedamageto

developingcountries.

2SeeM?rsdorf(2022)foradiscussionandempiricalassessmentoftheCBAMusingtheGlobalTradeAnalysisProject(GTAP)-Emodel.

3TheirpaperisanoverviewofthearticlesinaspecialissueofEnergyEconomics,Volume34,Supplement2,December2012,forwhichtheyaretheeditors,seeB?hringer,Baliestreri,andRutherford(2012b).

4WhethertheCBAMiscompliantwithWorldTradeOrganization(WTO)ruleshasnotbeenadjudicated.CBAMtariffscouldbeviewedascountervailingdutiestooffsetacostadvantageincountrieswithoutataxoncarbon(seeHufbauer2021a,2021bandHufbauer,Kim,andSchott2021).ForanearlierdiscussionofclimatepoliciesandWTOcompliance,seeHufbauer,Charnowitz,andKim(2009).

5Krugmanalsonotesarelatedproblem:thefactthatacountrycouldarguethatitusesonlycleantechnologyforexportsandreservesdirtytechnologyforgoodssoldonthedomesticmarket.AlthoughpotentiallyimportantforanargumentabouttheWTOlegalityofCBAMtariffs,thedistinctionisignoredinmostempiricalwork(seePaulKrugman,“Wonking

Out:TwoCheersforCarbonTariffs,”NewYorkTimes,July16,2021,

https://www.nytimes.

com/2021/07/16/opinion/carbon-tariffs-climate-change.html

).McAuslandandNajar(2013);

Hufbauer,Charnowitz,andKim(2009);andHowseandEliason(2008)discussthelegalityof

theCBAM.

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B?hringer,TaranF?hn,andRosendah(2012)provideacomprehensive

analysisofdifferentmethodsofcomputingcarbontariffs.Theyconsiderthree

carboncontentmetrics:directemissions,directemissionsplusoneroundof

indirectemissionstoincludeelectricityasaninput,andtotaldirectandindirect

emissionsthatcapturealldirectandindirectlinkages.Theyalsoconsidera

rangeofeligiblecommoditiesdifferentiatedbydegreesofenergyintensityto

thecaseofallcommodities.Theyalsoconsiderdifferentiatingtariffsbycountry

andsectororjustbysector.Theyevaluatethedifferentcarbonmetricsby

carbonleakageandefficiencyoutcomesusingacomputablegeneralequilibrium

(CGE)model.Theyfindthatthemostcost-effectivepolicyimposestariffson

allimportedproducts’directemissionsandemissionsfromelectricityuseasan

intermediateinputwhileexcludingotherindirectemissions.

Followingthisstrandoftheliterature,thispaperpresentstheresultsof

simulationsoftheeffectsofCBAMtariffsondomesticproductionandtrade

flowsinamultisector,multicountrygeneralequilibriumframework.6Itconsidersa

coalitionofhigh-incomecountriesthatintroducesataxoncarboninproduction

andtaximportsfromothernontaxregionsbasedonthecarbonembodiedin

production.Theanalysisusesdifferentcalculationsofcarbontariffs,describedas

threecarbonmetricsinB?hringeretal.(2012b).

ClimateClubs

Intermsofclimatemitigation,theworldisinanoncooperative,low-abatement

equilibrium(likethefamousprisoner’sdilemmagame)(Nordhaus2015).

ThisconditiondoomedtheKyotoagreementandthe26thConferenceof

Parties(COP26),heldinGlasgowin2021.Nordhausarguesthatamechanism

(“persuasivecoercion”)isneededtopunishthefreeriderswhocurrently

gainfromnoncompliance.7Hesuggeststhatcarbon-taxingcountriesforma

“climateclub”thatimposespunitivetariffsagainstnontaxerstoinducethemto

jointheclub.8Accordingtohim,ifthetargetcarbonpriceislow(say,$25per

ton),arelativelylowuniformimporttariffofabout2percentwillinducefull

participationinthecooperativeequilibrium.Ifthetargetpriceishigh(say,

$100perton),therequiredabatementcostforeachcountryrisessharply,tilting

towardnonparticipationevenwithhighertariffs.

ThislastpointisconsistentwiththeresultsofCarraro(1993),whofinds

thatthegametheoryconditions(profitabilityandstability)existforthereto

benofreeridersinacoalitionforaninternationalagreementtoprotectthe

environment.However,cooperationamongallcountriesisfragile,requiring

suitableschemesofcommitmentandtransfers.HagenandSchneider(2021)

6ThereisalongtraditionofusingCGEmodelstoanalyzethelinksbetweenunilateralclimatepolicyandcompetitiveness.SeeCarboneandRivers(2020)forasurvey.

7See,forexample,Lim?o(2005)andConconiandPerroni(2002)fortwogame-theoreticanalysesoftheuseoftradesanctionstogaininternationalcooperationoncross-borderexternalities.

8SeeBuchanan(1965)andOlson(1965)forearlyexpositions,SandlerandTschirhart(1980)foraliteraturesurvey,andCornesandSandler(1986)foranexpandedtextbookdiscussionofclubs.

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examinethestrengthofcoalitionswhennonmembersretaliateandraisetariffs

againsttheirimportsfromclubmembers.Theyfindthatstablecoalitionsmustbe

largerwhennonmemberscanretaliate.

Asitisagametheorymodelofstrategicinteractions,Nordhaus’s(2015)

modelishighlyaggregatedandstylized.Forexample,itdoesnotconsiderthe

effectsoftradediversioninresponsetotariffpolicies.Caron(2012)emphasizes

thatdisaggregationmattersandthataggregatedcalibrationswilltendto

underestimatethereductionincarbonleakages.Duanetal.(2021)identifythe

determinantsofinternationaltrade,suchasproductivityandtradecosts,andthe

potentialfortradediversion,whichreducetheeffectivenessofenvironmental

regulationstoreduceemissions.

Combiningagametheorymodelofstrategicparticipatingwithtrade

diversioninadisaggregatedframeworkiscomputationallychallenging.

B?hringer,Carbone,andRutherford(2016)useageneralequilibriumframework

toconsiderthestrategicvalueofcarbontariffswithaNashequilibriumof

simultaneousorpredeterminedmovesfromallparties(unlikeinNordhaus2015,

thestrategicinteractionsareexogenous).Intheiranalysis,coalitioncountries

reduceCO2emissionsby20percentbyusingauniformdomesticcarbontax

(acrossallsectorsandcountries)andimposingcarbontariffsonallcountriesnot

inthecoalition.Theirresultsindicatethatthethreatofcarbontariffscaninduce

nonmemberstojointhecoalition.

Thegametheoryanalysisindicatesthatclimateclubsarefeasibleanda

potentialtoolforaddressingthefree-riderprobleminherentindealingwitha

globalpublicgoodsuchasmitigatingclimatechange.Climateclubtradepolicies

canhaveasignificantimpactonnonmembers(persuasivecoercion),facilitating

cooperativebehavior.

Followingthisstrandoftheliterature,thispaperusesaglobalCGEmodel,

whichincludesmanysectorsandmanycountriesandthereforeallowsfortrade

diversion,whichtheliteraturehasnotedcanlimittheeffectivenessofclimate

clubs.Thepaperconsidersaspecificclimateclub—acoalitionofcountriesthat

excludesthebiggestCO2emitters,ChinaandtheUnitedStates.9Itconsiders

threevariants:oneinwhichChinaistheloneholdout,oneinwhichthe

UnitedStatesistheloneholdout,andoneinwhichbothChinaandtheUnited

Statesareholdouts.

Tradepolicy(punitivetariffsbyclubmembersagainstthenonmember)is

mosteffectiveinthemostextremecaseofasingleholdout,becauseitprovides

nopossibilityfortradediversion.Leavingmajorpollutersoutoftheclublimits

theglobalCO2reductionwhenclubmembersimposeacarbontax.Ahigher

domesticcarbontaxandahighercarbontariffmaybeneededtoachievethe

desiredreductioninglobalCO2emissions.

6Ouinein斗Jopuoopenomissions斗Jepin6souomoinCOCO)sool3ACOCO}oJeposoJid斗ion(.AseJosul斗‘i斗is}eJ斗uoJelon6斗uen斗uoUni斗opS斗e斗oswi斗uJosdoo斗斗oos斗eqlisuin6epomos斗iodJiooo}oeJqon.

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BothChinaandtheUnitedStatesarelikelytoholdout;neitherhasacarbon

taxandbothseemreluctanttoadoptdomesticstrategiestomitigateCO2

emissions.10Bothcountrieshavestrongtradetieswithotherregionsthrough

globalvaluechains.MexicoandCanadadependheavilyontradewiththe

UnitedStates;EastandSoutheastAsiadependheavilyontradewithChina.

Clubmembersmaybehurtwhenpunitivetariffsareappliedtoaholdout

regionthatisanimportanttradepartner.Thesimulationspresentedillustrate

thepoweroftradetheory;theyarenotintendedtoidentifygame-theoretic

consistentcoalitions.

Theanalysisconsiderstwoissuesnotaddressedintheliterature.Thefirstis

theexistenceofstrongtradedependencybetweenclubmembersandaholdout

region,whichmakesthecoalitionfragile.Tradedependentclubmembersmaybe

hesitanttousepunitivetariffsagainsttheirmajortradepartner.Second,the

analysisconsidersthemagnitudeofforgoneexportearningsfortheholdout

regionasclubmemberscollecttariffrevenueagainstexportsfromtheholdout.

Theeffectivetransferofexportearningstoclubmembersmayinducethe

holdoutstojointheclub.

THEDATA

GreenhouseGas(GHG)Emissions

GHGemissionsintheatmosphereincludeCO2,nitrousoxide,methane,andwater

vapor,allofwhichoccurnaturally,andfluorinatedgases,whicharesynthetic.

TheanalysisfocusesonCO2emissionsprimarilyfromenergyuseinproduction

andconsumption.

Energyuseaccountsfor73.2percentoftotalgreenhousegasemissions,

dwarfingthecontributionsofagriculture,forestry,andlanduse(18.4percent);

industry(5.2percent);andwaste(3.2percent)(figure1).Roadtransport

(whichaccountsfor11.9percentofemissions),ironandsteel(7.2percent),and

chemicalproduction(3.6percent)allusefossilfuelsasintermediateinputs.The

productionprocessforsomeindustries(e.g.,cement,chemicals)alsoreleases

GHGemissions.11ThemodelingdoesnotaccountfortheadditionalGHGsfrom

theseindustrialproductionprocesses(whichmakeupthe5.2percentcited

above).TheothertwosourcesofGHGemissions—agriculture,forestryandland

useandwaste—arelikelynon-CO2sourcesandarenotpartofthisstudy.

10TherecentlysignedInflationReductionActintheUSestablishesacollectionofsubsidypoliciestoreduceemissionsandrepresentsamodeststeptowardsmeetingtheUS’scarbonreductiongoals.SeedeBolle(2019)foradiscussionofapotentialcarbontaxintheUnitedStatesandHufbauer(2021a,2021b)foradiscussionoftradeimplications.

11Producingcementfromlimestoneandclayrequiresahightemperature,forexample,andthelimestoneitselfgoesthroughachemicalreactionthatreleasesgasesintheprocess(

https://

/newshour/show/can-concrete-a-major-co2-emitter-be-made-greener

).

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Figure1

Globalgreenhousegasemissions,bysector,2016

In2016,globalgreenhousegasemissionswere49.4billiontonnesCO2equivalent

Source:Ritchie(2020)accessedvia

OurWorldinD

.LicensedunderCC-BYbytheauthor

HannahRitchie(2020).

GlobalTradeAnalysisProject(GTAP)Data

ThedatafortheglobalsimulationmodelcomefromtheGlobalTradeAnalysis

Project(GTAP),version10,whichuses2014asthebaseyear.Figure2provides

dataoncarbonemissionsandsharesofglobalexportsbycountry/region(for

moredetails,seeappendixtableC.1).Threeeconomies(China,theUnitedStates,

andtheEuropeanUnion)accountfor54percentofglobalCO2emissions.At

10percent,theEU27accountsforamuchsmallershareofglobalemissionsthan

China(27percent)ortheUnitedStates(17percent)(panela).12

12Accordingtodataonemissionsfromthe2018WorldDevelopmentIndicators(thelastpre-

COVIDyearforwhichdataareavailable),Chinaaccountedfor30percentofglobalCO2

emissionsandtheUnitedStatesfor15percent.

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Figure2

BasedatasharesofglobalCO2emissionsandtrade,bybloc

a.GlobalCO2emissionsbyregion

percentoftotal

UnitedStates

China

EU-27

Otherhigh-incomecountries

Allothercountries

UnitedStates

China

EU-27

Otherhigh-incomecountries

Allothercountries

17

27

54%ofglobal

2

COemissions

10

12

34

b.Globaltradebyregion

percentoftotal

23%ofglobaltrade

10

13

30

21

26

Note:Globaltradereferstoexportsvaluedatfreightonboard(fob).Basedataarefor2014.

Source:Authors’calculationsusingGTAPv10data.

Together,ChinaandtheUnitedStatesaccountfor23percentofglobal

trade—amuchlowersharethantheirshareofcarbonemissions(44percent).

TheEU-27hasthelargestshareofglobaltrade(30percent),indicatingitsstrong

potentialforusingtradepolicyinstruments.Ifotherhigh-incomecountries

(excludingtheUnitedStates)joinedtheEuropeanUniontoformaclimateclub,

thetotaltradeweightwouldreach51percent.

TheGTAPdatabaseconsistsofsocialaccountingmatrices(SAMs)on

65sectors/productsand141countriesandregions.13Themodeltreatsregions

andcountriesasunifiedeconomies.

Thisstudyexamined19economies(countriesorregions)and22sectors.

ThesectorsincludethefivesectorslikelytofaceCBAMtariffs:ironandsteel,

aluminum,cement,fertilizers,andelectricity.(SeeappendixAfordetailsonthe

aggregationoftheGTAPdata.)

ThemodelalsousessatelliteaccountdataproducedbytheGTAP.Six(three-

dimensionalenergybyuserbyregion)matricesrecordthevolumesofenergy

inputsusedbyactivitiesandpurchasedbyhouseholds,inmilliontonsofoil

equivalent(MTOE).Anothersix(three-dimensional)matricesproducetheCO2

emissionsassociatedwitheachenergycommodityanduseragent.Thisdatabase

supportsanalysisofthequantitiesofenergyinputsused,inherentdifferences

13Theunderlyingdatabasehasbecomethestandardforglobalgeneralequilibriummodeling

(Aguiaretal.2019).

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betweenenergycommodities,andvariationsinthetechnologiesusedby

producersandconsumersindifferentregions.Italsoprovidestaxinformation

onenergyinputusebypurchasingagents,allowingthemodeltoincorporate

differencesinenergypoliciesbyregion(for2014).Thedatabaseincludes

householdconsumptionofenergycommoditiesandtheiremissionimplications.14

(AppendixfigureC.1showseachregion’saveragefossilfueltaxesbypurchasing

agent.ThesetaxesareonenergyuseanddonotaccountfortheCO2emitted

intheuseofenergybypurchasingagent.Thesetaxratesdonotchangein

thesimulations.)

DirectandIndirectCO2Emissions

Forallregions,theGTAPdatabaseincludesinput-outputtablesthattracethe

supplychainsofintermediateinputsusedinproduction.Astandardanalysis

usestheinput-outputtablestocomputethedirectandindirectsourcesofCO2

emissionsfromproductionprocesses.Forexample,generatingelectricityby

burningcoaldirectlyproduceshugevolumesofCO2.Anyindustrythatuses

electricityindire