David Duff

A growing number of scholars, environmentalists, politicians, and business leaders have recommended border carbon adjustments (BCAs) to support domestic climate policies. BCAs can levy a domestic carbon price on imports. By extending domestic policies beyond a jurisdiction’s boundaries, BCAs can put domestic and foreign industries on a level playing field, counter carbon leakage, and incentivize other jurisdictions to take climate action. In theory, BCAs offer the promise of environmental, economic, and political benefits. However, despite their potentially substantial benefits and backing from prominent leaders, BCAs are largely absent in practice. Although an increasing number of carbon-pricing policies have been adopted throughout the world, very few examples of BCAs exist, and so far none have been implemented at a general scale in any jurisdiction. In order to explain this puzzle and investigate the conditions under which policy-makers do, or do not, adopt and implement BCAs, this research empirically tests a series of hypotheses using four case studies of experiences with BCAs in the European Union (EU) and in California. The case studies comprise the inclusion of international flights in the EU’s cap-and-trade system, stationary installations in this system, the inclusion of electricity imports in California’s cap-and-trade program, and industrial facilities in this program. This research draws on information from 43 expert interviews and a wide range of published materials, including quantitative data. The research finds several barriers that prevent the adoption and implementation of BCAs in practice. Policy-makers are likely to meet domestic political opposition to BCAs, may run into opposition from other governments, and may encounter concerns about the circumvention of BCAs. In fact, domestic industry stakeholders overwhelmingly oppose BCAs since they prefer alternative measures, such as free allocation of emission allowances. They also oppose because BCAs may result in a stakeholder’s increased exposure to carbon pricing, and export-oriented industries fear trade war and retaliation from other jurisdictions. Therefore, the circumstances in which BCAs may be implemented successfully, and thus the scope for applying BCAs in practice, appear to be more narrow than acknowledged in the literature.

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