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Benefits and Risks of Border Carbon Adjustments | Q&A with Julio Friedmann

US Senator Chris Coons and Representative Scott Peters have recently introduced draft legislation to create a border carbon adjustment (BCA) on some imported goods.[1] The move follows a draft BCA proposed by the European Union as part of the “Fit for 55” plan.[2] Both measures seek to support the goal of reduced greenhouse gas (GHG) emissions globally while protecting their trade-exposed, high-emitting industries. Although other kinds of border tariffs and import taxes are common, these would be the first border carbon adjustments ever put in place. If enacted, the BCAs could potentially have profound implications for global trade, jobs, climate, and enabling a just transition of the energy sector. Dr. Julio Friedmann, a senior research scholar at the Center on Global Energy Policy (CGEP), sat down with CGEP editors to answer some questions about how border carbon adjustments work and their benefits and risks.

Q. What is a BCA?

A. A border carbon adjustment (sometimes called a carbon border adjustment mechanism) is a tariff levied on imported goods according to their associated GHG emissions. A nation or trade bloc that creates a BCA must estimate the associated GHG emissions from their own internal or domestic production of particular goods. It must also estimate the emissions associated with the production of similar goods in other nations. The difference between these values determines if and how a tariff is levied. In other words, if an imported product has higher associated emissions than a domestic product, it gets hit with a tariff.

The specifics of a BCA can vary a great deal, and there can be a lot of variables to contend with in the design. These variables include (a) the goods that are covered, (b) the baseline for estimating the tariff, (c) the tariff level, (d) how greenhouse gas intensities are estimated, and (e) how the BCA is administered. There has been a great deal of scholarship around the design, benefits, and impacts of a BCA, but no country or region has ever imposed one.

Q. Why create and implement a BCA?

A. There are two key reasons for introducing a BCA: climate and trade. Climate change is, after all, a global challenge, and progress in reducing GHG must be made beyond the borders of any one country. In addition, some industries are “trade exposed,” meaning that small cost differences could lead to substantial loss of international market share, jobs, and government revenues. Trade-exposed sectors include iron and steel, fertilizer, aluminum, and chemicals, all of which are internationally traded commodities. All have big local emissions and small commercial margins. In some cases, these sectors have additional importance as sources of national revenue and high-paying jobs or because of organized labor needs or national security. In addition, imported and exported fuels have different GHG footprints and arguably should be rated according to carbon intensity. There have been arguments made that just the threat of a BCA is sufficient to generate some of these benefits.

In theory, a BCA can lead to several benefits for efforts to address climate change:

  • Drive high-emitting nations and sectors to reduce their emissions or accelerate emissions reduction.
  • Prevent offshoring of key domestic sectors (“leakage”) due to domestic regulation.
  • Protect jobs and trade in key industries. Part of the justification of a BCA is that domestic goods are cleaner than many imported ones.
  • Generate additional environmental benefits, such as pollution reduction.
  • Encourage trade within well-performing nations.
  • Generate revenues for the implementing nation.

This last point has high relevance in current political circumstances. In the US, the revenues from the proposed BCA could potentially generate $16 billion per year. In both the US and the EU, the BCA revenues would help support additional climate and energy innovations, provide funding to disadvantaged communities, and help build infrastructure for clean energy and climate adaptation.

Q. What are the risks and concerns around a BCA?

A. BCAs can have undesirable knock-on effects on trade. Specifically, a BCA may lead to escalating trade differences or disputes, and nations impacted by a BCA can respond with retaliatory tariffs. These problems could lead to loss of trade, loss of jobs, and diplomatic tensions between countries. For example, several nations, including China, India, and Russia, have very high GHG intensities for exported goods, which could create tensions around climate deals or important issues beyond climate and energy, such as refugees or national security.

A separate question involves legal standing. It is unclear if BCAs, including those proposed in the EU and US, would survive a challenge in the World Trade Organization. Ultimately, the outcome would be sensitive to the specifics of the BCA’s design and implementation. Some nations have announced their intentions to mount challenges if a BCA is enacted. In general, a BCA could diminish interest in cooperation between nations, which is important to achieve success in global deep decarbonization.

And as with any new tariff, tax, or policy, there are concerns about design. Since no BCAs exist today, poor design could lead to problems with implementation and effectiveness, including in the failure to meet key goals (i.e., raising revenues or protecting jobs and critical sectors).

Q. What do we know about the carbon footprint of key imported commodities?

A. The current legislative proposals would cover specific commodities: fuels (coal, oil, natural gas, and electricity), iron and steel, fertilizer, aluminum, and cement. Generally, it is possible to estimate the carbon content of these commodities, the energy and emissions associated with production and transportation, and relevant upstream emissions associated with feedstocks or fuels, such as biomass or natural gas. In some cases, like assessing oil, estimating GHG content is relatively straightforward, and in others, like estimating methanol, it is more complicated. It is also difficult to verify the GHG intensity of goods due to different reporting standards and data availability from nations and producers.

There is an additional difficulty in estimating certain key terms that could complicate the design and implementation of any BCA. Experts disagree on the radiative forcing of key greenhouse gases (effectively, how much they heat up the planet) like methane, the life-cycle footprint of biomass (including wastes), the validity of offsets (such as avoided deforestation) contracted with production, and other technical terms in estimating GHG intensity. There are no international standards or protocols for estimating greenhouse gas emissions for some commodities, fuels, and variables. Some governments do not collect data or lack approved methodologies to estimate GHG intensities. Notionally, it is possible to provide third-party certification around commodity production practices, although some countries see this as an infringement on sovereignty.

Q. What are alternatives to a BCA?

A. There are other approaches that can deliver the central goals of BCAs, including encouraging faster emissions reductions, fostering positive trade, and protecting jobs. One such approach is an output-based rebate (OBR),[3] which rewards domestic producers that implement GHG reductions beyond what is required by regulation and penalize those who do not. OBRs exist in Canada and have led to reduced GHG intensities of key trade-exposed sectors.

Another alternative is a “club of nations”[4] approach, wherein a set of proactive nations would create a set of GHG policies and standards that would lead effectively to a preferred trade bloc. This approach could create a “virtuous cycle” of enhanced cooperation and drive those nations with higher carbon intensity products and practices to gain (or regain) trade access.

These and similar approaches could clean domestic industries, provide some protection to jobs, and foster collaboration between nations. However, they would not generate revenues as a BCA would. In addition, they may also face hurdles related to design, implementation, and enactment.

[3] Noah Kaufman, John Larsen, Ben King, and Peter Marsters, “Output-Based Rebates: An Alternative to Border Carbon Adjustments for Preserving US Competitiveness,” CGEP, December 3, 2020,  https://www.energypolicy.columbia.edu/research/commentary/output-based-rebates-alternative-border-carbon-adjustments-preserving-us-competitiveness.

[4] David G. Victor, “The Case for Climate Clubs,” The E15Initiative, January 2015, https://e15initiative.org/wp-content/uploads/2015/09/E15-Climate-Change-Victor-FINAL.pdf.


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Benefits and Risks of Border Carbon Adjustments | Q&A with Julio Friedmann