Carbon Pricing: What Role for Border Carbon Adjustments?

Abstract

management. to the 2021 United Nations Climate Change Conference, also known as COP26, in November 2021. Pressure for BCAs will likely intensify as some countries and regions move ahead aggressively with carbon pricing while others do not. Abstract This Climate Note discusses the rationale, design, and impacts of border carbon adjustments (BCAs), charges on embodied carbon in imports potentially matched by rebates for embodied carbon in exports. Large disparities in carbon pricing between countries is raising concerns about competitiveness and emissions leakage, and BCAs are a potentially effective instrument for addressing such concerns. Design details are critical, however. For example, limiting coverage of the BCA to energy-intensive, trade-exposed industries facilitates administration, and initially benchmarking BCAs on domestic emissions intensities would help ease the transition for emissions-intensive trading partners. It is also important to consider how to apply BCAs across countries with different approaches to emissions mitigation. BCAs are challenging because they pose legal risks and may be at odds with the differentiated responsibilities of developing countries. Furthermore, BCAs provide only modest incentives for other large emitting countries to scale carbon pricing—an international carbon price floor would be far more effective in this regard. that it explore carbon border taxes as part of its trade policy agenda. Prior to the election, the Biden campaign signaled support for imposing a BCA on imports from countries that are failing to meet their climate and environmental obligations.