The Expansion Of Carbon Border Adjustment Under The Paris Framework: Alternative Designs And Efficiency-Equity Trade-Offs

Climate actions under the Paris Agreement are characterized by regionally fragmented policies with asymmetric stringencies. The resulting carbon leakage and competitiveness concerns motivate countries to adopt carbon border adjustment (CBA) to complement domestic carbon pricing. A globally acceptable CBA regime should not only facilitate global abatement, but also require equitable burden-sharing. We therefore investigate the efficiency and equity dimensions of two alternative CBAs in a generalized multilateral context. We reveal a typical “efficiency-equity†trade-off between two CBA regimes. The standard CBA, which equalizes subjected carbon prices among different sourced goods, is mainly justified by higher environmental effectiveness, but has the pitfall of driving inequitable competitiveness outcomes. By contrast, an alternative CBA approach equalizing cost increases from carbon pricing could result in more balanced competitiveness effects and less trade disturbance, but it is somewhat compromising in emission reductions. Overall, however, neither of the two CBAs provides substantial cost savings for global abatement.