Designing Effective Border Carbon Adjustment Mechanisms: Aligning the Global Trade and Climate Change Regimes

Policy work in both the United States and the European Union (“EU”) is underway on how best to structure border carbon adjustment (“BCA”) mechanisms to protect the competitiveness of domestic industries while these enterprises make investments in reducing their greenhouse gas (“GHG”) emissions. Often, these investments are costly for domestic industries, and may therefore result in lost sales in a global marketplace where companies in other jurisdictions face no parallel obligation to address climate change and thus can bring products to the market at lower cost. Such shifts in sales and production not only cause economic harm and potential job losses in nations with high levels of commitment to climate change action but also result in carbon leakage—meaning that emissions are not ultimately reduced but rather shifted to nations with more limited GHG emissions control requirements. But while the United States and the EU share an ambition to use BCA mechanisms, they have embraced different approaches to BCA design and implementation. The European Commission has determined that the adjustment methodology should credit only explicit GHG pricing tools, including carbon taxes and GHG emission allowance trading schemes, in determining which exporting countries would escape BCA tariffs. On the other hand, the U.S. government believes that border adjustments should be based on a broader climate change policy calculus, which would consider a wider set of policies that reduce GHG emissions. In this Article, we develop a taxonomy of approaches to comparing policies in importing and exporting countries and identify the two options that are most feasible from a technical and political perspective—we call these two options explicit BCA mechanisms and effective BCA mechanisms. We then further analyze the strengths and weaknesses of these two approaches. In particular, we compare explicit versus effective BCA mechanisms on the basis of their environmental effectiveness, administrative efficiency, compatibility with World Trade Organization (“WTO”) law, and political viability. We conclude that BCA mechanisms that compare effective GHG prices promise better environmental outcomes and are more likely to be found compatible with WTO law than BCA mechanisms that exclusively compare explicit GHG prices. In addition, we argue that, while implementing BCA mechanisms that compare effective carbon prices creates some additional administrative challenges, many jurisdictions have trade policy pricing experience that could be harnessed to address these potential obstacles.