Cross-Border Impacts of Climate Policy Packages in North America
Cross-BorderImpactsofClimatePolicyPackagesinNorthAmerica Jean-MarcFournier,TannousKass-Hanna,LiamMasterson,Anne-CharlotteParet,andSnehaDThube WP/24/68 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 MAR ©2024InternationalMonetaryFundWP/24/68 IMFWorkingPaper RESandWHD Cross-BorderImpactsofClimatePolicyPackagesinNorthAmerica PreparedbyJean-MarcFournier,TannousKass-Hanna,LiamMasterson,Anne-CharlotteParet,andSnehaDThube* AuthorizedfordistributionbyFlorenceJaumotteandKoshyMathaiMarch2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Wequantifycross-bordereffectsoftherecentclimatemitigationpoliciesintroducedinCanadaandtheU.S.,usingtheglobalgeneralequilibriummodelIMF-ENV.Notably,withthesubstantialemissionreductionsfromCanada’scarbontax-ledmitigationpoliciesandtheU.S.’InflationReductionAct,thesetwocountrieswouldbridgetwo-thirdsofthegaptowardtheirNationallyDeterminedContribution(NDC) goals.Whilethebroadlydivergentpoliciesarebelievedtoelicitcompetitivenessconcerns,wefindtheaggregatecross-bordereffectswithinNorthAmericatobeverylimitedandrestrictedtotheenergyintensiveandtradeexposedindustries.Potentialcarbonleakagesarealsofoundtobenegligible.Amoremeaningfuldifferencetriggeredbypolicyheterogeneityisratherdomestic,especiallywithU.S.subsidiesincreasingenergyoutputwhiletheCanadamodelwithacarbontaxwouldmarginallydecreaseit.Thisanalysisiscomplementedbyastylizedmodelillustratinghowsuchdivergencecanaffectthetermsoftrade,butalsohowtheseeffectscanbecounteredbyexchangerateflexibility,borderadjustmentsordomestictaxation. RECOMMENDEDCITATION:Fournier,Jean-Marc,TannousKass-Hanna,LiamMasterson,Anne-CharlotteParet,andSnehaDThube(2024).“Cross-BorderImpactsofClimatePolicyPackagesinNorthAmerica”,IMFWorkingPaperWP/24/68.InternationalMonetaryFund,WashingtonDC. JELClassificationNumbers: C68,F18,H20,Q43,Q48 Keywords: ClimatePolicy;ClimateChangePolicy;NationallyDeterminedContributions(NDCs);Mitigation;Climatesubsidies;CarbonTax;Carbonpricing;Spillovers;NorthAmerica;Global;IMF-ENVmodel;ComputableGeneralEquilibrium(CGE)models;Competitiveness;GreenhouseGasEmissions(GHG);RevenueRecycling;InflationReductionAct(IRA);Power;Electricity Author’sE-MailAddresses: jfournier2@imf.org,TKass-Hanna@imf.org,LMasterson@imf.org,AParet-Onorato@imf.org,SThube@imf.org WORKINGPAPERS Cross-BorderImpactsofClimatePolicyPackagesinNorthAmerica PreparedbyJean-MarcFournier,TannousKass-Hanna,LiamMasterson,Anne-CharlotteParet,andSnehaDThube1 1TheauthorsaregratefultoNigelChalk,MaiDao,FlorenceJaumotte,BikasJoshi,KoshyMathai,NicholasRivers,SimonVoigts,AnkeWeberandtheparticipantsatthe13BISConsultativeCouncilfortheAmericasResearchConferencefortheirhelpfulcommentsandsupport.WethankJadenKimforprovidingexcellentresearchsupport. Contents I.Introduction6 II.DescriptionofLegislatedClimatePackages9 A.ClimateandEnergysecurityrelatedprovisionsintheU.S.InflationReductionAct9 B.Canada’sCarbonPricingLedMitigationStrategy10 C.Mexico’sMulti-ProngedStrategy11 III.LiteratureReview13 A.WithinCountryEffectsofClimateChangeMitigationMeasures13 B.Cross-BorderEffectsofUnilaterallyIntroducedClimateChangeMeasures15 IV.ShortPresentationandMainResultsofTheoreticalModel19 V.ModelDescriptionandScenarios21 VI.QuantitativeResults24 A.Scenario1a—DomesticandCross-BorderEffectsofCanada’sCarbonPricingPolicy24 B.Scenario1b—Cross-BorderEffectsoftheInflationReductionActintheU.S25 C.Scenario1c—Cross-BorderEffectsofCanada’sGreenSubsidies26 D.Scenario1—CombinedEffectsoftheJointU.S.’andCanada’sClimatePolicies27 E.SensitivityAnalysis30 VII.Conclusion33 AnnexI.StylizedModel35 AnnexII.IMF-ENVAssumptionsonParameters40 AnnexIII.ModellingDetails41 AnnexIV.DetailedResults42 References45 FIGURES 1.TradeCoverage6 2.IRAClimateRelatedMeasures,byType9 3.IRAClimateRelatedMeasures,bySector9 4.Canada-AnnouncedClimateMeasures,bySector10 5.KeyVariablesby2030inScenario1a,bySector25 6.KeyVariablesby2030inScenario1b,bySector26 7.KeyVariablesby2030inScenario1c,bySector27 8.KeyVariablesby2030inCombinedScenario1,bySector28 9.AggregateVariablesby203029 10.Canada:CarbonPricingImplicationsonGDPin203030 TABLE 1.ScenarioDescription23 BOX 1.RoleofIRAinReachingtheNDCTarget32 I.Introduction Theramp-upofclimatepoliciesintheUnitedStatesandCanadainrecentyearsillustrateshowdivergentclimatepoliciesmayelicitcompetitivenessconcerns.Canadaadoptedacarbonpricingstrategyin2019(addingamoreambitiouspricingpathalongwithanemissionreductionroadmapin2022)andcomplementedcarbonpricingwithinvestmenttaxcreditsforgreenenergyandcleanmanufacturinginthe2023budget. Differently,intheUnitedStates,the2022InflationReductionAct(IRA)islargelycenteredaroundgreensubsidiesfor
