Designing Effective Border-Carbon Adjustment Mechanisms : Aligning the Global Trade and Climate Change Regimes

Policy work in both the United States and the European Union is underway on how best to structure border carbon adjustments (BCA) mechanisms to protect the competitiveness of domestic industries while these enterprises make investments in reducing their greenhouse gas (GHG) emissions—thereby incurring costs that might result in lost sales in a global marketplace where companies in other jurisdictions face no parallel obligation to address climate change and thus can bring products to the market at lower cost. Such shifts in sales and production not only cause economic harm and potential job losses in nations with high levels of commitment to climate change action but also result in carbon leakage—meaning that emissions are not ultimately reduced but rather shifted to nations with more limited GHG emissions control requirements. But while there is a shared ambition to use BCA mechanisms, the United States and the EU have embraced different approaches to BCA design and implementation. The European Commission has determined that the adjustment methodology should credit only explicit GHG pricing tools, including carbon taxes and GHG emission allowance trading schemes, in determining which exporting countries would escape BCA tariffs. On the other hand, the U.S. government believes that border adjustments should be based on a broader climate change policy calculus leading to a comparison of a wider set of policies that reduce GHG emissions. In this article, we develop a taxonomy of approaches to compare policies in importing and exporting countries and identify the two options are more feasible from a technical and political perspective. We then further analyze the strengths and weaknesses of these two approaches. In particular, we compare explicit versus effective BCA mechanisms on the basis of their environmental effectiveness, administrative efficiency, and compatibility with World Trade Organization (WTO) law. We conclude that designing BCA mechanisms that compare effective GHG prices promise better environmental outcomes and would be more likely to be found compatible with WTO law than BCA mechanisms that exclusively compare explicit GHG prices. In addition, we argue that, while implementing BCA mechanisms that compare effective carbon prices poses some additional administrative challenges, many jurisdictions have trade policy pricing experience (most notably in antidumping and countervailing duty cases) that could be harnessed to address these potential obstacles