Joseph Aldy examines competitiveness risks from domestic carbon pricing policies, as well as the risks posed by competitiveness policies (for example, border tax adjustments) intended to alleviate adverse impacts of carbon pricing. The paper presents two alternative frameworks for evaluating competitiveness policy options.

Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level.  At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases.  Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task.  Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms.  We examine the opportunities and challenges associated with the major options for carbon pricing:  carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.