Staff Climate Notes

Carbon Pricing: What Role for Border Carbon Adjustments?

Author/Editor:

Ian W.H. Parry ; Peter Dohlman ; Cory Hillier ; Martin D Kaufman ; Florian Misch ; James Roaf ; Christophe J Waerzeggers ; Miss Kyung Kwak

Publication Date:

September 27, 2021

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

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.

Series:

Staff Climate Note No 2021/004

Subject:

Climate change Environment Export subsidies Greenhouse gas emissions Imports International trade