Border Carbon Adjustments: Should Production or Consumption be Taxed?

Abstract

Border Carbon Adjustments (BCAs) may play an important role in lowering the economic costs of greenhouse gas mitigation and in overcoming political-economy constraints on the use of carbon taxes or equivalent measures. A carbon tax plus a full BCA could deal with the competitiveness challenges arising from carbon taxes by using the WTO's National Treatment principle to apply equal levies on domestic production and on imports, and by symmetrically rebating the carbon tax on exports in the manner of a value-added tax (VAT) export rebate. This approach would shift the base for carbon taxation from production to demand and potentially achieve substantial reductions in the cost of cutting emissions. It would avoid the massive measurement and compliance problems associated with BCAs based on foreign emission intensities. By contrast, import-only BCAs distort prices of importables relative to exportables; create divisive trade conflicts and deterioration in the terms of trade for developing countries; and likely require development of complex sets of import preferences.

The roles of agricultural trade and trade policy in climate change adaptation and mitigation

“…For example, 'smart agriculture' that enhances soil carbon (Lobell and Villoria 2022) or payment schemes to slow down deforestation (Alix-Garcia and Wolff 2014). Moreover, the emergence of new types of measures, such as the European Union's (EU) recent introduction of a carbon border adjustment mechanism (CBAM) for certain industrial goods and a deforestation regulation that seeks to eliminate the importation of goods produced in recently cleared lands, are likely to become a main focus of international agricultural trade discussions in the near future (Meyer and Tucker 2021, Matthews 2022, Heath and Meyer 2023, Martin 2023.…”