Will Border Carbon Adjustments Work?

Abstract

The potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil.