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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.
Ian W.H. Parry

from these taxes. In short, carbon taxes often run counter to distributional objectives, and in practice, their design may be subject to the constraint that they do not worsen income inequalities. Higher energy prices may also harm the competitiveness of energy-intensive firms in trade-sensitive sectors where it is difficult to pass forward higher input costs into final product prices. Moreover, reduced production at home by these firms may cause increased production in other countries, thereby causing emissions leakage (i.e., emissions increases in other countries

Florian Misch

historical emissions ( United Nations 1992 ). This could imply that appropriate carbon prices would be lower in developing countries than in advanced countries. Given that some parties might be unable to fulfill their NDCs due to financing and technological constraints, developed countries collectively are required to mobilize $100 billion a year (through public and private sources) to help developing countries (Article 9). As countries are responsible for greenhouse gases emitted within their borders, potential emissions leakage to foreign countries might be neutralized

Mr. Michael Keen, Ian W.H. Parry, and Mr. James Roaf

domestic industries in the presence of domestic carbon pricing, particularly for energy-intensive, trade-exposed (EITE) industries—this improves economic efficiency in the sense of preventing distortions in the relative prices of domestic and foreign goods (i.e., clean and polluting industries at home and abroad are treated alike) 5 and can aid the political acceptability of carbon pricing; To reduce the risk of emissions leakage , that is, partially offsetting emissions increases in foreign countries induced by domestic mitigation policy—this objective signals a

Mr. Michael Keen, Ian W.H. Parry, and Mr. James Roaf

, or IMF management. Abstract 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

International Monetary Fund. Asia and Pacific Dept

would reinforce mitigation incentives. 3. Pricing could be based on proxy estimates of emissions but a compensation scheme for the farm sector may be needed to enhance acceptability and limit emissions leakage. Direct monitoring of farm level emissions is not currently practical, but emissions can be estimated indirectly using farm-level data (on livestock herds, feed, crop production, fertilizer use, and acreage) and default emissions factors. 1 Emissions taxes may face strong political opposition and could cause significant emissions leakage as the tax burden

Florian Misch

Kaufman, Kyung Kwak, Florian Misch, James Roaf, and Christophe Waerzeggers. 2021. “Carbon Pricing: What Role for Border Carbon Adjustments?” IMF Staff Climate Note 2021/004, International Monetary Fund, Washington, DC. ISBN: 978-1-51359-454-5 (Paper) 978-1-51359-460-6 (ePub) 978-1-51359-465-1 (PDF) JEL Classification Numbers: Q31, Q35, Q38, Q48, H23 Keywords: Border carbon adjustment, climate mitigation, carbon pricing, competitiveness, emissions leakage, allowance allocation, design issues, World Trade Organization rules. Authors

Carolyn Fischer

to determine whether special policy treatment for EITE sectors is needed, and if so, to evaluate which policy options are best and how they should be structured, you first have to know the magnitude of the problems you are trying to address. Over the past few years economists have investigated this question and, while their results are sensitive to modeling assumptions, the best evidence suggests that, given a moderate carbon price, both competitiveness losses and emissions leakage are real but modest problems – though higher carbon prices undoubtedly present

International Monetary Fund. Asia and Pacific Dept

industrial competitiveness from carbon-price-induced increases in energy prices and reduce the risk of 'emissions leakage'. The authorities should consider whether a BCA for energy-intensive, trade-exposed (EITE) industries might be an appropriate instrument for Korea, at some future point, perhaps after early experiences with an EU BCA. The coordination issue relates to discussions about an additional international mechanism to complement the Paris Agreement by scaling up action among key emitters in a multilateral way. One potential mechanism for this is an international