Abstract
Approximately one fourth of global emissions are embodied in international trade and a significant portion flows from non-carbon-priced to carbon-priced economies. Border carbon adjustments (BCAs) figure prominently as instruments to address concerns arising from unilateral climate policy. Estimating the volume of emissions that could be potentially taxed under a BCA scheme has received little attention until now. This paper examines how a number of issues involved in the implementation of BCAs can affect their ability to cover emissions embodied in trade and thus address carbon leakage. These issues range from ensuring compliance with trade provisions and assumptions on the carbon intensity of imports, to determining which countries are included and whether intermediate and final demand are considered. Here we show that the volume of CO2 captured by a scheme that involved all Annex B countries could be significantly reduced due to these issues, particularly by trade provisions, such as the principle of ‘best available technology’ (BAT). As a consequence, the tariff burdens faced by non-Annex B parties could dwindle considerably. These findings have important policy implications, as they question the effectiveness and practicalities of BCAs to reduce carbon leakage and alleviate competitiveness concerns, adding further arguments against their implementation.
Highlights
One fourth of global emissions are embodied in international trade and a significant portion flows from non-carbon-priced to carbon-priced economies
This research adds to the literature by showing that some aspects related to Border carbon adjustments (BCAs) implementation, trade provisions, substantially reduce the volume of emissions along the supply chain that could be potentially taxed and contribute to seriously diminish the tariff burdens faced by exporting economies
We argue that issues involved in BCA implementation, related to trade provisions, assumptions on the carbon intensity of products and sectoral and country coverage, seriously affect the volume of emissions captured by the scheme irrespective of how allowances are allocated or how the domestic carbon price is determined
Summary
One fourth of global emissions are embodied in international trade and a significant portion flows from non-carbon-priced to carbon-priced economies. The tariff burdens faced by non-Annex B parties could dwindle considerably These findings have important policy implications, as they question the effectiveness and practicalities of BCAs to reduce carbon leakage and alleviate competitiveness concerns, adding further arguments against their implementation. This paper, in this sense, aims to shed light on the matter by quantifying the volume of emissions that could be levied by BCAs, an aspect that has not received the proper attention in the literature For this purpose, we take into account issues involved in BCA implementation related to trade provisions, carbon intensity of products and sectoral and country coverage. We examine how these issues influence the tariff burdens faced by non-carbon-priced economies This allows assessing the ability of BCAs to reduce leakage and their true contribution to climate policy
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