Environmental ambition and economic protectionism: The design of border carbon adjustments

Border carbon adjustments (BCAs) are intended to limit carbon leakage while protecting domestic industry, but governments differ over whether border charges should price total embodied emissions or only emissions above an intensity benchmark. We study this design choice in a plant-level general equilibrium model of the global steel industry with heterogeneous technologies and vertical supply chains. A rate-based BCA is equivalent to an emissions charge combined with an implicit output sub-sidy. It therefore weakens the carbon-price signal, encourages reshuffling of cleaner output toward the regulated market, and can induce leakage through underpriced carbon-intensive intermediates. In an EU-style setting with domestic carbon pricing, the rate-based design transmits only 36% of the mass-based border price needed to achieve the same global emissions reduction and yields larger welfare losses. In a US-style setting without a domestic carbon-price anchor, it mainly shifts rents toward domestic downstream industries rather than inducing abatement abroad.