Internalizing Climate Externalities from Internationally Traded Goods: Challenges and Way Forward for Border Carbon Adjustment Mechanisms

Products traded internationally account for a large share of global greenhouse gas (GHG) emissions — and thus, the trading system has been widely regarded as a problem with respect to the global response to climate change. Implementing border carbon adjustment mechanisms is widely regarded as a crucial tool to tackle carbon leakage. At present, a number of major emitters, including the European Union, has advanced proposals to introduce a charge at the border based on the levels of GHG emissions embedded in imported products. Such border carbon adjustment measures may be implemented by individual jurisdictions, be negotiated among a selected group of trade partners, or coordinated multilaterally within the framework of the World Trade Organization (WTO). This paper focuses on the latter, discussing the WTO’s role in fostering multilateral cooperation on border carbon adjustment, while examining challenges and opportunities that may arise from addressing border carbon adjustment at the multilateral level.