Cross-Border Impacts of Climate Policy Packages in North America

By Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, Sneha D Thube

March 22, 2024

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Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube. Cross-Border Impacts of Climate Policy Packages in North America, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We quantify cross-border effects of the recent climate mitigation policies introduced in Canada and the U.S., using the global general equilibrium model IMF-ENV. Notably, with the substantial emission reductions from Canada’s carbon tax-led mitigation policies and the U.S.’ Inflation Reduction Act, these two countries would bridge two-thirds of the gap toward their Nationally Determined Contribution (NDC) goals. While the broadly divergent policies are believed to elicit competitiveness concerns, we find the aggregate cross-border effects within North America to be very limited and restricted to the energy intensive and trade exposed industries. Potential carbon leakages are also found to be negligible. A more meaningful difference triggered by policy heterogeneity is rather domestic, especially with U.S. subsidies increasing energy output while the Canada model with a carbon tax would marginally decrease it. This analysis is complemented by a stylized model illustrating how such divergence can affect the terms of trade, but also how these effects can be countered by exchange rate flexibility, border adjustments or domestic taxation.

Subject: Carbon tax, Climate policy, Commodities, Electricity, Environment, Taxes

Keywords: Canada's Carbon pricing policy, Carbon pricing, Carbon Tax, Climate Change Policy, Climate Policy, Climate policy package, Climate subsidies, Competitiveness, Computable General Equilibrium (CGE) models, Divergent policy, Electricity, Global, Green subsidy, Greenhouse Gas Emissions (GHG), IMF-ENV model, Inflation Reduction Act (IRA), Mitigation, Mitigation policy, Nationally Determined Contributions (NDCs), North America, Power, Revenue Recycling, Spillovers

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/068
Stock No:

WPIEA2024068
ISBN:

9798400268960
ISSN:

1018-5941

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