## Carbon Pricing: What Role for Border Carbon Adjustments?

_Staff Climate Notes, September 27, 2021_

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**Canonical URL:** [Carbon Pricing: What Role for Border Carbon Adjustments?](https://www.imf.org/en/publications/staff-climate-notes/issues/2021/09/24/carbon-pricing-what-role-for-border-carbon-adjustments-464805)

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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

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### 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.

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## Content in this bundle

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_Source: https://www.imf.org/en/publications/staff-climate-notes/issues/2021/09/24/carbon-pricing-what-role-for-border-carbon-adjustments-464805_