Accounting for the Carbon Price Paid in a Country of Origin Under Carbon Border Measures

With the growing number of carbon pricing policies and border measures around the world, a central challenge is determining how to account for carbon prices that are already paid in the country of origin. Border measures are typically designed to prevent carbon leakage by equalizing carbon costs across jurisdictions, but doing so requires translating diverse carbon pricing designs into comparable measures of carbon cost. Without such recognition, producers may effectively be charged twice for the same ton of carbon emitted.As the first operational carbon border adjustment mechanism (CBAM), the EU CBAM provides a concrete framework for addressing this issue. The regulation does so by specifying that “an authorized declarant may claim … a reduction in the number of CBAM certificates to be surrendered … only if the carbon price has been effectively paid in the country of origin,” and that “any rebate or other form of compensation” must be taken into account (Regulation (EU) 2023/956 establishing a Carbon Border Adjustment Mechanism, Article 9). This requirement highlights a central challenge: determining what constitutes a carbon price that has been “effectively paid,” particularly across jurisdictions with different policy designs.This “double counting” concern is particularly salient in a world where carbon pricing also occurs at the subnational level. In countries such as the United States, Canada, and China, carbon pricing systems often operate at the state or provincial level. As interest in carbon pricing continues to grow, partly due to the crediting mechanism of the EU CBAM (Clausing et al. 2024), the question of whether and how to recognize these subnational policies becomes increasingly important for the incentives it creates. In a country like the United States, where a national carbon price is currently politically unlikely, maintaining incentives for states to enact carbon pricing may be attractive to support emissions reductions.Determining how to account for carbon prices already paid is not a purely technical exercise. Different approaches lead to different economic and geopolitical outcomes via spillover incentives, environmental effectiveness, administrative complexity, and international equity. More flexible approaches to recognizing carbon pricing may better encourage policy spillovers; however, this may weaken the ability of the implementing jurisdiction to protect their industry and equalize carbon costs.This issue brief investigates how carbon prices paid in a country of origin could be accounted for under border measures, with a particular focus on subnational carbon pricing systems. We begin by discussing the relevance of subnational policies in international trade and the extent to which they already shape market access and regulatory conditions. We then outline the key challenges associated with defining “effective payment,” particularly in the context of subnational carbon pricing systems. Building on a framework proposed by Wildgrube et al. (2024), we evaluate different approaches to crediting carbon prices—including actual payment, average price, and hybrid methods—and assess how these approaches shape incentives for producers, subnational jurisdictions, and importing authorities. Throughout, we highlight the trade-offs between administrative feasibility, accuracy in measuring effective carbon costs, and the broader implications for policy design. We illustrate these issues using trade between the European Union and California as a motivating case study.