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
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
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
, 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
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
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