Carbon Leakages, Consumption-based Carbon Taxes and International Climate Change Agreements

The issue of devising an efficient and equitable global climate change mitigation agreement is examined. While the possibility of catastrophic damages contingent on unmitigated climate change provides cogent reasons for self-interested, large countries to unilaterally mitigate there are practical reasons for them not to do so. A key concern for developed countries is possible carbon leakages. For developing countries, the need to pursue growth objectives can restrict the proclivity to mitigate. Carbon leakage issues can be addressed using border tax adjustments although these raise computational complexity, GATT-rules consistency and equity issues for developing countries. If the efficiency gains from utilising border tax adjustments are to be realised, compensation schemes must address these equity issues. An analysis is provided explicitly addressing the role of China and the United States.