Cross-Border Impacts of Climate Policy Packages in North America

Cross-Border Impacts of Climate Policy Packages in North America Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube WP/24/68IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2024 MAR INTERNATIONAL MONETARY FUND 2 © 2024 International Monetary Fund WP/24/68IMF Working Paper RES and WHD Cross-Border Impacts of Climate Policy Packages in North America Prepared by Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube* Authorized for distribution by Florence Jaumotte and Koshy Mathai March 2024 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: We quantify cross-border effects of the recent climate mitigation policies introduced in Canada and the U.S., using the global general equilibrium model IMF-ENV. Notably, with the substantial emission reductions from Canada’s carbon tax-led mitigation policies and the U.S.’ Inflation Reduction Act, these two countries would bridge two-thirds of the gap toward their Nationally Determined Contribution (NDC) goals. Whil e the broadly divergent policies are believed to elicit competitiveness concerns, we find the aggregate cross-border effects within North America to be very limited and restricted to the energy intensive and trade exposed industries. Potential carbon leakages are also found to be negligible. A more meaningful difference triggered by policy heterogeneity is rather domestic, especially with U.S. subsidies increasing energy output whil e the Canada model with a carbon tax would marginally decrease it. This analysis is complemented by a stylized model illustrating how such divergence can affect the terms of trade, but also how these effects can be countered by exchange rate flexibility, border adjustments or domestic taxation. RECOMMENDED CITATION: Fournier, Jean-Marc, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube (2024). “Cross-Border Impacts of Climate Policy Packages in North America”, IMF Working Paper WP/24/68. International Monetary Fund, Washington DC. JEL Classification Numbers: C68, F18, H20, Q43, Q48 Keywords: Climate Policy; Climate Change Policy; Nationally Determined Contributions (NDCs); Mitigation; Climate subsidies; Carbon Tax; Carbon pricing; Spillovers; North America; Global; IMF-ENV model; Computable General Equilibrium (CGE) models; Competitiveness; Greenhouse Gas Emissions (GHG); Revenue Recycling; Inflation Reduction Act (IRA); Power; Electricity Author’s E-Mail Addresses: jfournier2@imf.org, TKass-Hanna@imf.org, LMasterson@imf.org, AParet-Onorato@imf.org, SThube@imf.org INTERNATIONAL MONETARY FUND 3 WORKING PAPERS Cross-B order Impacts of Climate Policy Packages in North America Prepared by Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube1 1 The authors are grateful to Nigel Chalk, Mai Dao, Florence Jaumotte, Bikas Joshi, Koshy Mathai, Nicholas Rivers, Simon Voigts, Anke Weber and the participants at the 13 BIS Consultative Council for the Americas Research Conference for their helpful comments and support. We thank Jaden Kim for providing excellent research support. INTERNATIONAL MONETARY FUND 4 Contents I.Introduction .................................................................................................................................................. 6 II.Description of Legislated Climate Packages ...................................................................................... 9 A.Climate and Energy security related provisions in the U.S. Inflation Reduction Act ........................... 9 B.Canada’s Carbon Pricing Led Mitigation Strategy ............................................................................ 10 C.Mexico’s Multi-Pronged Strategy ...................................................................................................... 11 III.Literature Review ................................................................................................................................. 13 A.Within Country Effects of Climate Change Mitigation Measures ...................................................... 13 B.Cross-Border Effects of Unilaterally Introduced Climate Change Measures .................................... 15 IV.Short Presentation and Main Results of Theoretical Model ............................................................ 19 V.Model Description and Scenarios ............................................................................