Design and Predicted Effects of a Carbon Tax with Border Carbon Adjustment in the United States

Abstract

With Climate Change at the center of many global political and policy debates, a Pigouvian tax on carbon dioxide emissions remains a favorite solution among economists and other policy experts. However, asymmetric implementation of a carbon tax across the globe gives rise to several problems. A country which implements a carbon tax while others do not faces relatively higher energy and manufacturing costs than its taxless peers. As a result, its energy-intensive industries are made less competitive, and there is potential for significant carbon leakage. Border carbon adjustments (BCAs) are one measure designed to protect domestic firms and prevent carbon leakage, but there is not yet consensus on what form they might take. This thesis makes several recommendations for the design of a BCA and provides a prediction of the effect of a carbon tax combined with BCA on US production and carbon emissions.