Climate change has been the world’s first issue in the environmental agenda for over the last 25 years. Constant efforts to address this issue have been largely driven by international negotiations under the United Nations Framework Convention on Climate Change (UNFCCC), signed and ratified by most of the countries in the early-mid 1990’s.
Despite such efforts, negotiations have been conducted following special interest trying to prevent specific actions and therefore a lack of political will to take effective steps and measures has prevail. While the principle of “common but differential responsibilities” has played a central role in defining countries’ rights and obligations, there has been increasing demand from developed countries that both developed and developing countries would need to engage in commitments to address the problem.
Due to this absence of an effective international agreement, countries have unilaterally undertaken climate change policies. The price and market mechanisms to internalize environmental costs developed by such countries have been expressed mainly in two instruments: (i) tax on the carbon content of fossil fuels, often combined with a tax on energy use, and (ii) emission trading schemes (ETS).
ETS create a market-based instrument that encourages behavior through market signals rather than through explicit directives regarding pollution control levels, including instruments such as tradable allowances and pollution charges. The European Union, Switzerland, and New Zealand have developed ETS in light of its obligations under the Kyoto Protocol. Some other countries are developing or proposing to develop ETS with defined rules and complex procedures even when they are not Parties to the Kyoto Protocol (e.g. United States, Japan, Korea, China, Australia, and Canada).
Since emissions reduction policies are not applied universally, countries applying such policies are facing a competitive disadvantage compared to foreign energy-intensive industries facing uneven greenhouse gas constraints. The competitive disadvantage causes an increase in the level of emissions generated outside the region applying the system, the so called “carbon leakage”, which tends to undermine the effectiveness of a domestic climate mitigation policy.
In order to level the playing field and avoid carbon leakage, countries have experienced increased pressure for some sort of ‘border adjustment’ to complement unilateral actions against climate change. Arguments justifying such trade measures generally refer to competitive concerns, weakening of environmental efficiency, and further incentives for countries to join an international environmental agreement.
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