Durable fiat solves and a BCA can be implemented.
Fowlie et al. 21 — Meredith Fowlie, Professor in the Department of Agricultural and Resource Economics at UC Berkeley, Claire Petersen, B.A in Environmental Engineering from Northwestern University, Mar Reguant, Associate Professor in Economics at Northwestern University, Research Fellow at the Barcelona School of Economics, 2021 (“Border Carbon Adjustments When Carbon Intensity Varies across Producers: Evidence from California,” Energy Insiute at Haas, May, Available Online at , Accessed on 07-28-23)
California’s GHG pricing regime offers a rare opportunity to investigate how a BCA is working in practice. The experience to date highlights important tensions between GHG accounting accuracy, market efficiency, concerns about trade protectionism, and implementation complexity.
A simulation model calibrated to represent the western electricity market—and the most salient features of California’s GHG pricing regime—predicts that the differentiated border adjustment will be ineffective at mitigating emissions leakage regardless of the default GHG intensity chosen. The reason is that out-of-state zero-carbon resources can be preferentially dispatched to California, reducing California’s deemed GHG emissions without changing the system-wide carbon footprint. In practice, however, realized emissions outcomes appear to outperform this worst-case scenario. One interpretation is that the more nuanced compliance requirements, difficult to capture in a market simulation model, are mitigating emissions leakage. More generally, this policy experiment in progress helps elucidate the complexity of implementing a BCA when sources are substitutable and carbon intensity is heterogeneous