10. Design Options for Consumption-Based Policy Approaches: A Literature Review

Whereas most of this study concentrated on policy effectiveness, this chapter discusses additional criteria that a consumption-based climate policy—typically introduced by means of border carbon adjustments—must meet to prove politically feasible in a “real world” setting and also reviews proposals for the practical design of border measures. Many economists consider the adoption of consumption-oriented policies as legitimate only if these policies further environmental objectives. Additionally, it is often recommended to compensate developing countries for possible welfare losses that the introduction of such policies may bring—either by channeling the revenues from border taxes to these countries or by letting them levy an export tax instead of a carbon import tariff imposed by industrialized countries. Also, border measures should be introduced in a transparent fashion and only after consultations with the countries targeted by the measures. A review of four border adjustment design proposals shows that most authors recommend applying the adjustments not to all goods but only to a few carbon-intensive basic commodities. Also, most economists favor relying on carbon benchmarks instead of establishing the carbon content of each good separately. Some economists, however, criticize this approach as it would mean that much of the efficiency and incentive effects of the border scheme could be lost.