Border Carbon Adjustments

This policy brief by the International Institute for Sustainable Development (IISD) examines the design choices and trade-offs associated with Border Carbon Adjustments (BCAs). It describes BCAs as measures intended to prevent 'carbon leakage' by ensuring imported goods face carbon costs equivalent to domestic production, thereby supporting the integrity of domestic carbon pricing. The document outlines key decision points for policy-makers, including the scope of trade flows, geographic exemptions, emission categories (Scopes 1, 2, and 3), calculation methods for embedded emissions, and the allocation of generated revenues.

• Border Carbon Adjustments (BCAs) are designed to mitigate 'carbon leakage,' where domestic climate policies drive emissions to other countries because foreign firms do not pay a carbon price. The primary goal is to 'level the playing field between domestic producers who are subject to carbon pricing and foreign producers who are not.'
• BCA design varies based on the accompanying domestic policy: if paired with a carbon tax, it functions similarly to a Value Added Tax (VAT); if paired with a cap-and-trade system, such as the EU ETS, it requires importers to purchase emissions allowances.
• BCAs typically target a limited range of 'emissions-intensive trade exposed' (EITE) commodities—such as steel, aluminum, cement, plastics, chemicals, and nitrate fertilizers—because these goods are most susceptible to leakage and are administratively easier to track than complex manufactured goods.
• Policy-makers face a trade-off regarding export rebates: while not providing rebates may lead to carbon leakage as domestic producers lose market share in third countries, providing them may be viewed as a prohibited export subsidy under WTO rules or as counter to environmental goals.
• Calculating embedded emissions can be done via actual emissions data or default assumptions. Actual data provides incentives for firms to decarbonize but is costly and lacks an international standard; defaults are easier to administer but may unfairly penalize cleaner producers.
• Crediting foreign policies is necessary to avoid double-charging, but while price-based credits are straightforward, crediting non-price-based policies (e.g., anti-deforestation measures) is methodologically difficult and potentially illegal under WTO law.
• Revenues generated by BCAs can be retained for general government use, used to fund domestic decarbonization, or returned to exporting countries—particularly least developed or low-income nations—to support their low-carbon transitions and adhere to the principle of 'common but differentiated responsibilities.'

APA

Cosbey, A., & Baršauskaitė, I. (2023). Border Carbon Adjustments. International Institute for Sustainable Development. https://www.iisd.org/system/files/2023-08/border-carbon-adjustments-policy-makers.pdf

Chicago

Cosbey, Aaron, and Ieva Baršauskaitė. Border Carbon Adjustments. International Institute for Sustainable Development, 2023. https://www.iisd.org/system/files/2023-08/border-carbon-adjustments-policy-makers.pdf.

Wikipedia

{{cite report |last1=Cosbey |first1=Aaron |last2=Baršauskaitė |first2=Ieva |title=Border Carbon Adjustments |publisher=International Institute for Sustainable Development |date=August 2023 |url=https://www.iisd.org/system/files/2023-08/border-carbon-adjustments-policy-makers.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{cosbey2023border, author = {Cosbey, Aaron and Baršauskaitė, Ieva}, title = {{Border Carbon Adjustments}}, institution = {International Institute for Sustainable Development}, year = {2023}, month = aug, url = {https://www.iisd.org/system/files/2023-08/border-carbon-adjustments-policy-makers.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }