Border Carbon Adjustments Based on Avoided Emissions: Addressing the Challenge of Its Design

Carbon pricing is an essential instrument to address climate change. However international differences in carbon control policies may cause not only carbon leakage but also competitiveness disadvantages. In this context, border carbon adjustments are a promising tool for discouraging these problems. But designing a real-world border carbon adjustment instrument implies to consider significant issues: technical feasibility, data availability, the risk of retaliation from developing countries, and its compatibility within the World Trade Organization legal framework. There are still no conclusive answers about a proper design. This paper is an attempt to address the above-mentioned challenges proposing a carbon border tax (CBT) based on avoided emissions. Such a CBT is applied at a product level and not at a sector level, and all international prices are deflated to guarantee that import 'like' goods received a treatment similar to 'like' domestic products. Using the WIOD, we simulate a CBT based on avoided emissions applied by the European Union, and we compare the results with a CBT based on embodied emissions.