Designing border carbon adjustments for enhanced climate action
A growing body of evidence suggests that approaches to address the risk of leakage have not performed as intended, however, causing regulatory capture, perverse incentives, and windfall profits. Although often designed to be temporary, these measures have also proven resilient to change, and will likely remain in place given the observed context of persistent policy heterogeneity. As parties to the Paris Agreement engage in progressively more ambitious climate action, this situation may become increasingly untenable, generating pressure for more suitable approaches to counter leakage. An alternative mechanism to address leakage is implemented at the border, rather than behind it. Border carbon adjustments (BCAs) seek to alleviate the negative impacts of uneven climate efforts by including imports in, or exempting exports from, a carbon constraint. In their most elementary form, they can be a tariff or other fiscal measure applied to imported goods. They can also be implemented through the extension of other compliance obligations to imports, such as the requirement to purchase emission allowances. Or they can instead benefit exports, for instance through tax or regulatory relief. Based on an analysis of legal and economic literature as well as existing case studies and proposals, propose a BCA design that strikes a balance between legal durability, ease of implementation, and environmental performance. Its main parameters are outlined in the report.