Border carbon adjustments and the potential for protectionism

Balancing a legitimate fear that carbon leakage could undermine the impact of any global climate change agreement is a countervailing fear that leakage could be the excuse for protectionism in the guise of 'border carbon adjustments'. This would be dangerous for the world trading system, risking disputes due to ambiguities in the details of World Trade Organization rules over what types of border measures are potentially and actually admissible. Even with good-quality data, there is considerable potential for judgemental discretion, and hence opportunistic manipulation, inestimating the carbon chargestolevyonanimported product.Thisistrue even given agreement on whether to use importer or exporter coefficients. A clear distinction needs to be made between environmental and competitiveness motives for border adjustments. The key argument is that the traditional symmetry, between origin (production)-based taxes and other charges (e.g. duetoa cap-and-trade scheme) and those based on the destination (consumption) principle, breaks down in the case of carbon charges. The potentialisexplored forregional agreementstoensure originasthebasis for carbon levies, while recognizing the challenges this poses for the mutual recognition of emissions regimes in particular. © 2011 Earthscan.