Border Adjustments Economics versus Politics - resolved with international cooperation?

The policy brief examines the trade-off between free allowance allocation and border adjustments in emission trading schemes. It argues that while free allowances protect against carbon leakage, they undermine the effectiveness of carbon pricing. The author proposes that combining full auctioning with border adjustments—strictly limited to carbon-intensive commodities and based on the carbon intensity of best available technology—can address leakage. However, to avoid WTO violations and suspicions of protectionism from developing countries, these measures must be pursued through international cooperation rather than unilaterally.

• Free allowance allocation, used in the EU and the draft American Clean Energy and Security Act to prevent carbon leakage, reduces the effectiveness of carbon pricing by creating administrative barriers to innovation and subsidizing carbon-intensive production.
• Border adjustments can enable ambitious carbon pricing without the distortions of free allocation, provided they are limited to a few carbon-intensive commodities such as steel, clinker, and basic chemicals, and applied to all trade partners.
• To remain compatible with WTO rules and acceptable to developing countries, border adjustments must be strictly limited in five ways: they must be restricted to a narrow set of carbon-intensive commodities, limited to early stages of the value chain, scaled to the carbon intensity of best available technology, limited to sectors without free allowances, and focused solely on implementing effective domestic carbon pricing.
• Unilateral application of border measures risks destroying international trust and being perceived as protectionism by developing countries; therefore, international cooperation is necessary to establish a common understanding of their purpose.

APA

Neuhoff, K. (2009). Border Adjustments Economics versus Politics - resolved with international cooperation? Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/ba070709-final.pdf

Chicago

Neuhoff, Karsten. Border Adjustments Economics versus Politics - resolved with international cooperation? Climate Strategies, 2009. https://climatestrategies.org/wp-content/uploads/2014/11/ba070709-final.pdf.

Wikipedia

{{cite report |last1=Neuhoff |first1=Karsten |title=Border Adjustments Economics versus Politics - resolved with international cooperation? |publisher=Climate Strategies |date=7 July 2009 |url=https://climatestrategies.org/wp-content/uploads/2014/11/ba070709-final.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{neuhoff2009border, author = {Neuhoff, Karsten}, title = {{Border Adjustments Economics versus Politics - resolved with international cooperation?}}, institution = {Climate Strategies}, year = {2009}, month = jul, url = {https://climatestrategies.org/wp-content/uploads/2014/11/ba070709-final.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }