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Abstract
Carbon-based border tax adjustments (BTAs) have recently been proposed by some
OECD 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 US and EU on China’s sectoral
carbon emissions. The results indicate that BTAs will cut down export prices and transmit
the effects to the whole economy, reducing sectoral output-demands from both supply
side and demand side. On the supply side, sectors might substitute away from exporting
toward domestic market, 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 leads to energy substitution effect and somewhat stimulates
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 increasing, decreasing or moving in a different direction. These
results suggest that an incentive mechanism to encourage the widespread use of
environment-friendly fuels and technologies will be more effective.