Using border measures to address carbon flows

Abstract

The carbon leakage debates and the role of trade measures to address undesired effects from unilateral carbon pricing have significant policy implications. The basic principles found in both the climate and trade regimes that promote differentiation of national efforts on the one hand, and non-discrimination of trade partners on the other hand, create a systematic conflict of using trade measures for promoting climate policy. Moreover, the way in which national emissions are accounted has implications for the use and usefulness of trade measures. The UN inventory system relates to the point of production, not consumption, following the ‘polluter pays’ principle. The question of whether this limits the scope for using border adjustments is examined. In combination with insights from partial equilibrium models, it is attractive for policy makers to focus their efforts on a few carbon-intensive industries. However, policy makers not only need to decide about the environmental integrity, the administration and the political credibility of border measures, but also consider that any such measure, even if it aims at supporting global emission reductions, could disrupt the international climate negotiations processes.