The Economic and Emissions Impacts of Border Carbon Adjustments for New Zealand
The issue of emissions leakage has been widely debated by economists, yet there are few studies which consider the potential for leakage with respect to the New Zealand Emissions Trading Scheme (NZ ETS). Using the Climate PoLicy ANalysis (C-PLAN) model, this paper evaluates the impacts of a border carbon adjustment (BCA) on high energy-intensive (HEI) sector imports going into New Zealand. These results are directly compared to the existing output-based allocation (OBA) of emissions permits, which also aim to reduce leakage. We consider three different scenarios to compare the relative effects of BCAs to OBAs. When compared to the status quo benchmark case, there were modest welfare and GDP improvements. BCAs are shown to be more favourable than OBAs for mitigating leakage, and loss of domestic output to import substitution. Negative leakage was reported in the HEI sectors for both OBA and BCA scenarios, with the BCA policies having the largest impact. These results were due to many HEI sectors being subject to non-economic constraints that are binding in the baseline and policy scenarios, which prevented their growth throughout the observed period. Our evaluation adds to the literature on the economy-wide analysis of BCAs and sheds some insights into New Zealand climate and trade policy.