Border Adjustment Mechanisms and Domestic Institutional Capacity

• In Event: Effects of Climate Change and External Climate Policies on Domestic Politics

Abstract

Recently enacted mechanisms to put tariffs on the carbon content of imports, such as the European Union’s Carbon Border Adjustment Mechanism, and recently proposed schemes like the Methane Border Adjustment Mechanism, have attractive characteristics for reducing international emissions. The CBAM, for example, levies charges if the exporting country does not have a carbon price mechanism and hence encourages other countries to adopt programs akin to the EU’s own Emissions Trading System or other carbon pricing approaches. This paper contextualizes CBAM as a mechanism where climate policies in one policty impact domestic policy in other countries. We argue that the external impact of CBAM will depend on the institutional capacity of countries. As such we focus on the expected experience of developing countries. We further consider how policies like CBAM can be augmented in a way to facilitate institutional changes and technological advances in developing countries. For example, revenue raised from CBAM, or through other EU budgetary mechanisms, can be targeted to developing countries and in ways that do not undermine the underlying incentives induced by these border adjustment mechanisms. In particular we consider the role of technical assistance funding for countries with low institutional capacity to enact carbon pricing and a competitive grant fund that countries could apply to for things like technology transfer. We further discuss how this proposal crowds in the political-economy interests of European firms and organizations. If other countries like the United States adopt Border Adjustment Mechanisms, similar arguments apply.

Authors

• Tayla Belle Ingles, Harvard University

• Dustin Halliday Tingley, Harvard University

• Rochelle Sun, Harvard University