The counterplan solves the case by levying carbon taxes without BCAs, and then establishing OBRs to solve domestic competitiveness, without linking to the trade DA.

EITE: core industries, primarily manufacturing, that release large amounts of greenhouse gas emissions and face significant national or global competition for their products.

Are there other anti-leakage instruments?

The potential of BCAs to trigger international trade wars and under- mine cooperation in international climate policy raises the question whether alternative instruments to supplement unilateral emissions pricing might be less divisive under WTO rules. The short answer is yes, although they have their own drawbacks.

The first and most widely used option so far is output-based rebating (OBR), in which EITE firms receive free allowances or off- sets in proportion to their production needs. This option, used in the EU, California, Canada and New Zealand, means that firms can still reduce their carbon payments by reducing their emissions, but they do not bear the full costs of the remaining embodied emissions, which relieves competitiveness pressures. However, a disadvantage of this approach—which effectively subsidizes output—is that car- bon costs are not sufficiently passed on to consumers and users of EITE products. As a result, the incentives to conserve emissions are weakened and low-carbon substitutes are disadvantaged. Although OBR may be reasonably effective for individual countries, the costs of the output subsidies can exceed the benefit of avoided leakage for larger groups of emissions-pricing countries53.

A novel approach is to complement OBR with consump- tion taxes to create a ‘behind-the-border’ approach that mimics full BCAs with uniform benchmarks82. The idea is to use OBR to address leakage and competitiveness concerns while adding a tax on the consumption of EITE inputs—a tax that applies equally to domestic and imported goods—to send corrected price signals to the consumers83–85. Whereas BCAs are controversial under current WTO rules, a similar outcome can be achieved through a domestic rebate-tax scheme that is undoubtedly WTO compatible. Compared with import adjustments alone, the behind-the-border approach has the advantage of effectively rebating to exports, as exports are exempt from the consumption tax. From a practical perspective, the scheme is a straightforward extension of existing regulation, such as the output-based allocation to industries at risk of carbon leak- age in the EU ETS. There are also no extra administrative costs in determining the consumption taxes as long as benchmarks for the output-based allocation rates are already set.