Carbon Border Adjustments: Considerations for Policymakers

Carbon border adjustments, also referred to as “carbon border adjustment mechanisms” (CBAM), are an emerging set of trade policy tools that aim to prevent carbon-intensive economic activity from moving out of jurisdictions with relatively stringent climate policies and into those with relatively less stringent policies. Border adjustments have the potential to increase the environmental effectiveness of climate policies, by averting shifts in economic activity that could lead to higher total greenhouse emissions—a phenomenon known as “carbon leakage.” They are also seen as a way of protecting industrial competitiveness by reducing the incentive for businesses to move production abroad. The European Union (EU) is pursuing a CBAM that would make the region the first in the world to enact such a policy and would be aligned with the carbon price the bloc applies through its emissions trading system (ETS). Interest in border adjustments, paired without an explicit price, is growing in the United States. 

This primer provides a comprehensive introduction to the topic. After a brief explanation of basic concepts, it reviews the EU’s proposed CBAM and U.S. congressional border adjustment provisions introduced in the 117th Congress (2021–2022). It also outlines key considerations in designing a carbon border adjustment.