How to Apply Border Carbon Adjustments in Nations Without a Carbon Price

 

We as an Agile Advisors in Carbon Border Adjustment Mechanism, A substantial amount of literature examines the possibility of levying a border adjustment tax on commodities coming from nations that don't enact sufficiently aggressive carbon prices. A recent RFF working paper examines a more complicated subject: How might nations without a formal carbon price enact their own taxbase have become increasingly important climate policy tools on a global scale with the recent proposal for a border carbon adjustment (BCA) measure in the European Union and the recent bicameral bill by Senator Chris Coons (D-DE) and Representative Scott Peters (D-CA) to establish a BCA in the United States.BCAs aim to charge more for imported products with a high carbon footprint. These policies aim to prevent unfair trade advantages when one nation adopts more aggressive mitigation programs than its trading partners while also reducing global greenhouse gas emissions. In the absence of BCAs, businesses would have an incentive to move production to less regulated, higher-emitting nations.

Agile Advisors as a Carbon Border Adjustment Mechanism, CAs have charged importers a fee collected at the border when a trading partner with a less aggressive climate policy brings its products into the country. Countries typically are not concerned when foreign prices are higher. The tax is triggered if the country receiving foreign goods has a higher domestic carbon price than the trade partner. Without BCAs, businesses could relocate to a nation with a lower carbon price to avoid the higher domestic price in one place, especially in mobile and energy-intensive industries. This move would produce an unfair trade advantage and undercut the original climate policy's purpose of reducing emissions. Regarding carbon taxes or emissions trading programs like the EU Emissions Trading System, the fundamental objective behind BCAs is to ensure that overseas manufacturers are subject to the exact costs and incentives to cut emissions as local businesses. Use the entire local price in the absence of a foreign carbon price.

As a Carbon Border Adjustment Mechanism in Agile Advisors, Apply the difference if the overseas price is non-zero and less than the domestic price. BCAs raise various design issues because their incentives are essentially trade-off-driven and flawed. For instance, policymakers need to link the BCA to the carbon content of the actual imported goods rather than the average carbon emissions within a company or nation to establish incentives for imports comparable to those for domestic products. However, a policy like this would strongly encourage governments and businesses to export just their cleanest products—without necessarily lowering their products' carbon content. Furthermore, it also needs to be clarified if BCAs adhere to international trade regulations, whether they apply to commodities originating from developing nations, and whether they intentionally or unintentionally deter countries they target from enacting more robust climate policies. Yet, these issues get more complicated when considering a country like the United States.

In our role as Carbon Border Adjustment Mechanism, we will delve deeper into this topic in a forthcoming working paper. Still, the fundamentals are as follows: Consider how costs and incentives are structured inside the domestic policy package, then try replicating those exact costs and incentives within the BCA.The carbon price is a crucial component that can stabilize a BCA in a nation with a carbon tax or a complete emissions trading system. One can think of two primary characteristics of countries with alternative policies, such as an emissions trading plan with a sizeable free allocation: a charge on emissions above the exempted amount for each product and an exemption amount for emissions. The exempted amount acknowledges that domestic businesses do not pay any more taxes on emissions that do occur once they have incurred the mitigating costs necessary to bring emissions down to exempted levels.

Being a Carbon Border Adjustment Mechanism, in our working paper, we explore the many methods by which policymakers could determine those two parameters, the price applied to emissions above that level and the exempted emissions level, depending on the specific policy settings. But after those choices are made, imports can use those parameters. Thus, a BCA is feasible even in nations without a legally mandated carbon price. If a nation uses this strategy for an imported commodity, it won't want to overcharge if the country that exports the good also has its national climate policy. In that instance, it is crucial to consider the costs that would apply to the product differently in the exporting and importing countries. The BCA should be based on the difference between the importer's and exporter's effective charge on the product if the intention is to generate costs and incentives for imports comparable to those for domestic products. The working paper looks at several scenarios that vary depending on how the two countries' respective climate policies are structured and implemented.