Impacts of border carbon adjustments on China's sectoral emissions: Simulations with a dynamic computable general equilibrium model

Carbon-based border tax adjustments (BTAs) have recently been proposed by some OECD (Organization for Economic Co-operation and Development) countries to level the carbon playing field and target major emerging economies. This paper applies a multi-sector dynamic, computable general equilibrium (CGE) model to estimate the impacts of the BTAs implemented by the US and EU on China's sectoral carbon emissions. The results indicate that BTAs will decrease export prices and transmit the effects to the whole economy, affecting sectoral output and demand from both the supply side and demand side. On the supply side, sectors might move away from exporting towards the domestic market, thereby increasing sectoral supply, while on the demand side, the domestic income may be strikingly cut down due to the decrease in export price, decreasing sectoral demand. Furthermore, such shrinkage of demand may similarly reduce energy prices, which would lead to an energy substitution effect and somewhat stimulate carbon emissions. Depending on the relative strength of the output-demand effect and energy substitution effect, sectoral carbon emissions and energy demands will vary across sectors, with increases, decreases or shifts in different directions. These results suggest that an incentive mechanism to encourage the widespread use of environment-friendly fuels and technologies will be more effective than BTAs.

► The impacts of BTAs are analyzed with a dynamic CGE model for China. ► Our model includes 7 energy sectors and 30 non-energy sectors, and runs up to 2030. ► A BTA module is designed to describe the BTAs imposed by the US and EU. ► The impacts of BTAs on sectoral emissions will vary due to differing output-demand effect and energy substitution effect. ► An incentive mechanism to encourage the use of clean energy will be more effective than BTAs.