Will Border Carbon Adjustments Work?

Abstract

Abstract The potential for greenhouse gas (GHG) restrictions in some nations to increased emissions in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the impact of border carbon adjustments (BCAs) outlined in the American Clean Energy and Security Act of 2009 (H.R. 2454), 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 may be an effective coercion strategy.