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Ian W.H. Parry, Mr. Peter Dohlman, Mr. Cory Hillier, Mr. Martin D Kaufman, Florian Misch, Mr. James Roaf, Mr. Christophe J Waerzeggers, and Miss Kyung Kwak
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.
Mr. Michael Keen, Ian W.H. Parry, and Mr. James Roaf
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. For example, limiting coverage of the BCA to energy-intensive, trade-exposed industries facilitates administration, and initially benchmarking BCAs on domestic emissions intensities would ease the transition for trading partners with emission-intensive production. It is also important to consider how to apply BCAs across countries with different approaches to emissions mitigation. BCAs alone do not solve the free-rider problem in carbon pricing, but might be a step to an effective international carbon price floor.
Mr. Michael Keen, Ian W.H. Parry, and Mr. James Roaf

1. Introduction As countries consider more aggressive climate mitigation policies, the question of whether some form of ‘border carbon adjustment’ (BCA) is appropriate has become central to the wider climate debate . The EU’s recent announcement of a BCA proposal in July 2021 1 , as well as BCA proposals in the United States 2 , have heightened interest in this instrument, not least as countries are revising their climate strategies in the run up to COP26 in November 2021. 3 Underlying this interest is a concern that more ambitious unilateral actions

Florian Misch

carbon pricing leads to a shift of carbon-intensive production abroad, offsetting the domestic emissions reductions). Acknowledging the trade effects and finding appropriate tools to address them may be necessary before many countries will price carbon at the levels needed. Large and growing disparities in carbon pricing across countries and regions has heightened interest in border carbon adjustments (BCAs) to address competitiveness and leakage concerns . A BCA is a charge on embodied carbon in products imported into a jurisdiction with carbon pricing, potentially

Jean Chateau, Ms. Florence Jaumotte, and Gregor Schwerhoff

climate policy but are concerned about competitiveness losses for their energy-intensive and trade-exposed (EITE) industries and carbon leakage if they adopt more stringent carbon-pricing policies than their partners. To offset these competitiveness losses, high-income countries are considering the use of border carbon adjustments (BCAs) (see, for example, European Commission 2021 for the European proposal). However, international cooperation to motivate action by all country groups is key to controlling climate change. HICs alone cannot reduce global emissions