## Border Carbon Adjustments: Rationale, Design and Impact

_IMF Working Papers, September 27, 2021_

## Source details

**Canonical URL:** [Border Carbon Adjustments: Rationale, Design and Impact](https://www.imf.org/en/publications/wp/issues/2021/09/24/border-carbon-adjustments-rationale-design-and-impact-466176)

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## Bibliographic details
- Authors: Michael Keen, Ian W.H. Parry, James Roaf
- Published: September 27, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781557752567.001

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### Summary
- This paper assesses the rationale, design, and impacts of border carbon adjustments (BCAs).
- Large disparities in carbon pricing between countries raise concerns about competitiveness and emissions leakage.
- BCAs are potentially the most effective domestic instrument for addressing these challenges—but design details are critical.
- BCAs alone do not solve the free-rider problem in carbon pricing, but might be a step to an effective international carbon price floor.

### Key findings
- Large carbon price differentials can create competitiveness pressures and emissions leakage.
- Limiting coverage of the BCA to energy-intensive, trade-exposed industries facilitates administration.
- Initially benchmarking BCAs on domestic emissions intensities would ease the transition for trading partners with emission-intensive production.
- It is important to consider how to apply BCAs across countries with different approaches to emissions mitigation.

### Design considerations
- Coverage: Focusing on energy-intensive, trade-exposed (EITE) industries to reduce administrative complexity.
- Benchmarking: Using domestic emissions intensities as an initial benchmark to smooth transition for trading partners.
- Cross-country application: Need to account for heterogeneous mitigation approaches across countries when applying BCAs.
- Legal and trade compatibility: Design choices should consider World Trade Organization rules and tariff implications.

### Impacts and limitations
- Effectiveness: BCAs can address competitiveness and leakage concerns domestically if carefully designed.
- Limits: BCAs do not by themselves resolve the international free-rider problem in carbon pricing.
- Role in international coordination: BCAs could be a stepping stone toward an international carbon price floor.

### Policy implications and recommendations
- Target initial BCA coverage on energy-intensive, trade-exposed industries to facilitate administration.
- Use domestic emissions-intensity benchmarks initially to reduce disruption for emission-intensive trading partners.
- Design BCAs with attention to differing national mitigation approaches to maintain fairness and effectiveness.
- View BCAs as part of a broader strategy that may include steps toward coordinated international carbon pricing.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2021/09/24/border-carbon-adjustments-rationale-design-and-impact-466176_