Push for favourable design features. As discussed, the final shape of any BCA could be very different, depending on choices made in its design. For example, a BCA that did not credit for foreign carbon prices paid would become a tool of protectionism rather than environmental protection. Similarly, some have suggested that some BCA revenues should be used to support affected developing country firms and countries.[12] Either individually or in concert, developing countries should push for principles and best practices that help ensure that any BCA works to prevent leakage and respects the principle of CBDR-RC, rather than to unfairly advantage domestic producers.[13] Some have suggested that such discussions might be anchored in a multilateral forum such as the World Trade Organization.[14]

Pursue carbon pricing. Affected countries could institute carbon pricing domestically or on a regional basis, to ensure that carbon taxes paid by their industry are paid to home coffers rather than to foreign authorities. The impacts of BCA alone probably do not justify domestic carbon pricing – in itself, not a simple exercise – in any but the most affected countries. However, carbon pricing has other domestic benefits and addressing foreign BCAs adds one more benefit to the list. Established regional cooperation platforms such as ASEAN and APEC might be valuable in exploring a coordinated approach to carbon pricing that would lower the administrative burden for any single country.

Support the decarbonization of domestic industry. Given their respective capabilities, developing countries can help emissions-intensive industries to decarbonize and equip them to take advantage of international carbon pricing. This could involve fiscal incentives, grants, support for research and development, supported demonstration projects, government procurement of low-carbon goods, and other means. Governments might also support domestic firms by compiling the sort of data that will be demanded by foreign BCA schemes, such as sectoral emissions intensity measurements. Support from the international community should be extended throughout.

Ultimately, future trade of some products will involve an accounting of their embodied carbon and penalties for GHG-intensity in the form of lost market share. There are threats and opportunities for developing country exporters in that future. Governments can serve their exporting sectors best by understanding and acting on both.

[1] - See Droege, S. (2009). “Tackling Leakage in a World of Unequal Carbon Prices.” Climate Strategies Working Paper.
[2] - Text of the proposal can be found at https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:52021PC0564.
[3] - The UK’s Environmental Audit Committee convened an inquiry on this question in 2021. Background available at: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:52021PC0564.
[4] - See the announcement of consultations and the accompanying background paper at: https://www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments.html.
[5] - Most recently that commitment appears in the United States Trade Representative’s 2021 Trade Policy Agenda and 2020 Annual Report. Available at: https://ustr.gov/sites/default/files/files/reports/2021/2021%20Trade%20Agenda/Online%20PDF%202021%20Trade%20Policy%20Agenda%20and%202020%20Annual%20Report.pdf.
[6] - Fleming, S. and C. Giles (2021): OECD Seeks Global Plan for Carbon Prices to Avoid Trade Wars. Financial Times. September 13, 2021.
[7] - Parry, I., S. Black, and J. Roaf (2021): Proposal for an International Carbon Price Floor among Large Emitters. IMF Staff Climate Notes 2021/001.
[8] - Okonjo-Iweala, N. (2021): Adopting a global carbon price is essential. Financial Times, October 14, 2021
[9] - German Finance Ministry (2021). Schritte zu einer Allianz für Klima, Wettbewerbsfähigkeit und Industrie - Eckpunkte eines kooperativen und offenen Klimaclubs https://www.bundesfinanzministerium.de/Content/DE/Downloads/eckpunkte-internationaler-klimaclub.pdf?__blob=publicationFile&v=3.
[10] - U.S. White House (2021). “The United States and European Union to Negotiate World’s First Carbon-Based Sectoral Arrangement on Steel and Aluminum Trade.” October 31. https://www.whitehouse.gov/briefing-room/statements-releases/2021/10/31/fact-sheet-the-united-states-and-european-union-to-negotiate-worlds-first-carbon-based-sectoral-arrangement-on-steel-and-aluminum-trade/.
[11] - Böhringer, C., J. C. Carbone, and T. F. Rutherford (2012). “Unilateral Climate Policy Design: Efficiency and Equity Implications of Alternative Instruments to Reduce Carbon Leakage.” Energy Economics 34 (S2): S208-S217
[12] - Gore, T., E. Blot, A. Cosbey, T. Voituriez, L. Kelly and J. Keane (2021). “What Can Climate Vulnerable Countries Expect from the CBAM?” Institute for European Environmental Policy Briefing Paper. https://ieep.eu/publications/what-can-climate-vulnerable-countries-expect-from-the-cbam.
[13] - Cosbey, A. (2021). “Principles and Best Practice in Border Carbon Adjustment: A modest proposal.” Trade and Sustainability Review, Vol. 1(4). https://www.iisd.org/publications/iisd-trade-sustainability-review-volume-1-issue-4-november-2021.
[14] - Bernasconi-Osterwalder, N., and A. Cosbey (2021). “Carbon and Controversy: Why we need global cooperation on border carbon adjustment.” International Institute for Sustainable Development. https://www.iisd.org/articles/carbon-border-adjustment-global-cooperation.