It Ain't Easy: The Complexities of Creating a Regime for Border Carbon Adjustment

Abstract:     
This brief aims to highlight some of the difficulties involved in elaborating a working border carbon adjustment (BCA) regime. It demonstrates both the tensions between the various possible BCA objectives and the necessarily imperfect options that are available for bridging the tension between regime effectiveness and compliance with trade law.

Key findings include:

• It is imperative to explicitly define the objectives of any BCA regime. BCA might be used to prevent leakage, to avoid loss of competitiveness, or to exert pressure that induces trading partners to take strong climate action. A host of design elements will differ markedly depending on which of these is prioritized.

• The design of a BCA regime often involves tension between the desire for an effective tool and the desire for legality under trade law. While a definitive judgment of BCA’s legal status is impossible ex ante, the existing uncertainty should give policymakers pause.

• Border carbon adjustment is a complex tool that necessarily involves trade-offs, shortcuts and difficult design choices. These shortcomings need to be born in mind when comparing BCA to other tools that might achieve the same ends.

Number of Pages in PDF File: 8

Keywords: climate change, trade, investment, WTO, BTA, border tax adjustment, border measures, UNFCCC, Kyoto

JEL Classification: K33, N70, N50, Q43

Accepted Paper Series