ESRI Discussion Paper Series No.291
A Dynamic Computable General Equilibrium Analysis of Border Adjustments for Climate Change Policy.

Shiro Takeda
Professor, Department of Economics, Kyoto Sangyo University
Susumu Suzuki
Senior Research Fellow, Economic and Social Research Institute, Cabinet Office
Toshihide Arimura
Professor, Faculty of Political Science and Economics, Waseda University


Using a multi-region, multi-sector computable general equilibrium model, this paper studies economic impacts of border adjustments for climate change policy. Our model is a 12 regions, 22 sectors recursive dynamic model from 2004 to 2020 and we use GTAP7.1 for a benchmark dataset. We assume that the developed regions (Annex B regions) impose carbon regulations and analyze what impacts border adjustments have on carbon leakage, energy-intensive trade-exposed (EITE) sectors, GDP and welfare.

Our main results are summarized as follows. First, border adjustments are effective in reducing carbon leakage but the size of effects is small. Second, border adjustments generally tend to restore international competitiveness of EITE sectors but it strongly depends on which countries and sectors. In addition, we show that border adjustments are especially beneficial for Japanese iron-steel sector. Third, the impacts of border adjustments on GDP and welfare are generally small.

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