Carbon Pricing: What Role for Border Carbon Adjustments?

Staff Climate Notes, September 27, 2021

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Bibliographic details

• Authors: Ian W.H. Parry, Peter Dohlman, Cory Hillier, Martin D Kaufman, Florian Misch, James Roaf, Christophe J Waerzeggers, Miss Kyung Kwak
• Published: September 27, 2021
• Series: Staff Climate Notes
• DOI: https://doi.org/10.5089/9781513594545.066

Summary and Rationale

• Border carbon adjustments (BCAs) are charges on embodied carbon in imports potentially matched by rebates for embodied carbon in exports.
• BCAs aim to address concerns from large disparities in carbon pricing between countries, specifically:
  • Competitiveness impacts on domestic industries.
  • Emissions leakage across borders.
• The Climate Note finds BCAs are a potentially effective instrument for addressing such concerns, conditional on careful design.

Key Findings

• Design details are critical to BCA effectiveness and acceptability.
• Limiting coverage to energy-intensive, trade-exposed industries:
  • Facilitates administration.
  • Targets sectors most at risk of competitiveness loss and leakage.
• Initially benchmarking BCAs on domestic emissions intensities:
  • Would help ease the transition for emissions-intensive trading partners.
• Applying BCAs across countries with different approaches to emissions mitigation requires careful consideration of methodological and equity implications.
• BCAs pose legal risks and may conflict with the differentiated responsibilities of developing countries under international frameworks.
• BCAs provide only modest incentives for other large emitting countries to scale up domestic carbon pricing.
• An international carbon price floor would be far more effective than BCAs in incentivizing large emitters to scale carbon pricing.

Design Considerations and Recommendations

• Coverage:
  • Focus on energy-intensive, trade-exposed industries to simplify administration and target effectiveness.
• Benchmarking:
  • Start with benchmarking on domestic emissions intensities to ease transition for partners with high emissions intensity.
• Treatment across policy regimes:
  • Develop rules to account for countries with different mitigation approaches to avoid double regulation or exemption loopholes.
• Legal and equity considerations:
  • Assess World Trade Organization rules and legal risks before implementation.
  • Consider the implications for differentiated responsibilities of developing countries.
• Complementary international policy:
  • Pursue international solutions—such as an international carbon price floor—to achieve stronger incentives for global carbon pricing than BCAs alone.

Limitations and Risks

• Legal risks under international trade law.
• Potential tension with the principle of differentiated responsibilities for developing countries.
• Modest leverage on other large emitters compared with coordinated international pricing mechanisms.

Content in this bundle

• Carbon Pricing: What Role for Border Carbon Adjustments?; September 27, 2021
  • Carbon Pricing: What Role for Border Carbon Adjustments?; September 27, 2021 (Markdown version)
  • Carbon Pricing: What Role for Border Carbon Adjustments?; September 27, 2021 (PDF)