Carbon border taxes short circuit international trade. They massively increase costs for international firms and governments.

What are the impacts of carbon pricing and border adjustment mechanisms?

There are nearly 70  carbon pricing schemes globally – these capture the costs of emissions in terms of climate change-related loss and damage to human health, the environment, property and so on and tie it to their source through a price, e.g. by applying a tax. However, approaches to pricing vary, and methods to compare their equivalence are only beginning to take form. This has prompted some governments to consider carbon border adjustment mechanisms (CBAMs), which work by imposing a fee on carbon-intensive goods being imported from countries with less stringent climate policy. This can be a way to level the playing field among firms subject to different climate-related regulations and taxes and can disincentivise companies from shifting their production activities to locations where operating costs may be lower due to less stringent climate policies (causing so-called ‘carbon leakage’). However, even if aimed at addressing legitimate environmental concerns such as carbon leakage, such unilateral measures can generate trade tensions and create high administrative costs for firms and governments engaging in international trade. They can further affect trade patterns by incentivising re-shoring (the shifting of production back home to avoid imports) or short-circuiting of supply chains (where less efficient exporters are favoured).