By Randolph Bell, Director, Atlantic Council Global Energy Center; Richard Morningstar Chair for Global Energy Security and Elena Benaim, Intern, Atlantic Council Global Energy Centre
Carbon border adjustment (CBA) policies are gaining momentum on both sides of the Atlantic. They were proposed as a key element in the European Green Deal and as part of US Democratic presidential nominee Joe Biden’s climate plan. But how do they work? Carbon border adjustment mechanisms tax imported goods based on their carbon footprint with the aim of limiting emissions leakage and levelling the playing field for domestic industries that produce goods with lower greenhouse gas emission footprints than imports that may be cheaper but have higher greenhouse gas footprints.
There are a number of technical challenges to overcome in implementing a carbon border adjustment policy, including whether to peg it to a domestic price on carbon, which sectors to apply the tax, and how to ensure accurate and transparent data on embodied carbon. But one major concern is that the policy could have negative consequences for the economies of developing countries by cutting their export revenue and/or impeding the development of new export-oriented industries. Developing countries might argue that the policy runs counter to the Paris Agreement’s bottom-up, nationally determined contributions, and could push them to cut emissions more than what they pledged. Carbon border adjustment could also run afoul of the Common But Differentiated Responsibility (CBDR) principle that developing countries do not share the same responsibility as developed countries in addressing climate and environmental issues.