Cross-Border Impacts of Climate Policy Packages in North America
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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.
Series:
Working Paper No. 2024/068
Subject:
Carbon tax Climate policy Commodities Electricity Environment Taxes
Frequency:
regular
English
Publication Date:
March 22, 2024
ISBN/ISSN:
9798400268960/1018-5941
Stock No:
WPIEA2024068
Format:
Paper
Pages:
49
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