Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature

Policymakers are often reluctant to implement strong carbon pricing for fear of disadvantaging domestic industries and offshoring emissions-intensive activities. Border carbon adjustment (BCA) would address such carbon leakage concerns by using trade measures to ensure that products from foreign producers facing lower (or no) carbon prices are on equal footing with domestically produced goods. Despite intuitive economic appeal, BCA requires numerous challenging regulatory choices, including its scope of applicability (i.e., which policies, goods, sectors, countries), the methodology for assessing the carbon content of products, the type and price of the adjustment, scenarios requiring modification, and how the resulting revenues will be used. Each of these choices has economic and environmental implications that influence the effectiveness of the BCA, as well as nuanced technical, legal, and political consequences that must be considered. In particular, the design of any BCA must comport with international agreements governing trade and climate policy responsibilities. This article reviews the economic and legal literature on BCA, provides guidance for the design and implementation of BCAs, and identifies research priorities.