Working Paper: NBER ID: w31310
Authors: Kimberly A. Clausing; Catherine Wolfram
Abstract: Jurisdictions adopt heterogeneous climate policies that vary both in terms of ambition and in terms of policy approach, with some jurisdictions pricing carbon and others subsidizing clean production. We distinguish two types of policy spillovers associated with diverse policy approaches to climate change. First, when countries have different levels of climate ambition, free-riders will benefit at the expense of more committed countries. Second, when countries pursue different approaches, carbon-intensive producers within cost-imposing jurisdictions will be at a relative competitive disadvantage compared with producers in subsidizing jurisdictions. Carbon border adjustments and climate clubs are attempts to respond to these policy spillovers, but when countries have divergent policy approaches, one policy alone will not be able to address both types of spillovers. We also consider the policy dynamics that result from carbon border adjustments and climate clubs; both have the potential to encourage upward harmonization of climate policy, but they come with risks. Further, the pressures of international competition in the presence of divergent climate policy approaches may result in subsidy races, which come with their own potential risks and benefits.
Keywords: climate policy; carbon pricing; subsidies; international trade; competitiveness
JEL Codes: F18; H23; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low ambition policies (J68) | freeriding behavior (H40) |
| freeriding behavior (H40) | high ambition countries (O57) |
| cost-imposing jurisdictions (H73) | competitive disadvantages (L19) |
| subsidizing jurisdictions (H20) | competitive disadvantages (L19) |
| carbon border adjustments (F38) | equalize competition (L13) |
| climate clubs (D71) | equalize competition (L13) |