The Economics of Border Carbon Adjustment: Rationale and Impacts of Compensating for Carbon at the Border

Lionel Fontagné and Katheline Schubert

Annual Review of Economics, 2023, vol. 15, issue 1, 389-424

Abstract: International trade contributes directly to global greenhouse gas emissions, as the carbon content of high-emission products is priced differently in different countries. This phenomenon is termed carbon leakage. Thus, not putting a price on carbon is theoretically equivalent to an export subsidy, although that would be difficult to challenge in the context of multilateral trade law. Leakage can be alleviated by pricing the carbon embedded in imported products through a border carbon adjustment (BCA), be it a tax, a carbon tariff, or a regulation requiring the purchase of emissions allowances. The design of a BCA is a compromise between environmental effectiveness in preventing leakage, economic effectiveness in preserving competitiveness and ensuring acceptability, technical feasibility of the implementation, and World Trade Organization compatibility. An import-limited BCA is more effective than free emissions allowances in reducing leakage, but it does not preserve the export competitiveness of the country imposing it.

Keywords: border carbon adjustment; carbon leakage; carbon tariff; climate club (search for similar items in EconPapers)
JEL-codes: F14 F18 H23 Q40 Q54 Q56 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Working Paper: The Economics of Border Carbon Adjustment: Rationale and Impacts of Compensating for Carbon at the Border (2023)
Working Paper: The Economics of Border Carbon Adjustment: Rationale and Impacts of Compensating for Carbon at the Border (2023)
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DOI: 10.1146/annurev-economics-082322-034040

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