Border Carbon Adjustments Revisited

To address concerns about competitiveness and carbon leakage, countries with ambitious climate policies are increasingly looking to combine unilateral carbon pricing with border carbon adjustments (BCA). BCA aim to create a level playing field between domestically regulated energy-intensive and trade-exposed industries and their competitors abroad by imposing charges on the (unpriced) carbon embodied in imports and (potentially) rebating carbon costs on exports. At the same time, BCA are seen as measures that may have protectionist motivation and shift the burden of climate policy onto poorer developing economies that bear less historical responsibility for climate change, have limited financial and technological capacity for decarbonization, and may depend on CO₂-intensive exports. For an informed policy debate, understanding how BCA alter the economic burden of unilateral emissions pricing across all countries is essential. However, quantitative impact estimates derived from ex-ante simulation analyses vary considerably in the applied economic literature due to divergent assumptions on key drivers whose relative importance is difficult to distinguish from the outset. Based on controlled simulations with a large-scale computable general equilibrium model of global trade and carbon use, this paper provides a systematic sensitivity analysis of three fundamental dimensions that determine the impacts of BCA: (i) the policy design of BCA; (ii) the price responsiveness of supply and demand; and (iii) the input-output data characterizing initial heterogeneities of production, consumption, and trade patterns across countries.