Full Title: Unworkable Solution: Carbon Border Adjustment Mechanisms and Global Climate Innovation
Author(s): Stefan Koester, David M. Hart, Grace Sly
Publisher(s): Information Technology & Innovation Foundation (ITIF)
Publication Date: September 20, 2021
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As policymakers hone their domestic climate policies to strengthen nationally determined contributions under the 2015 Paris Agreement, a persistent fear weighs on them. No leader wants to be the one who, in the name of combating climate change, ends up putting their domestic industries at a global competitive disadvantage, costing good paying jobs, reducing the tax base, and creating new security risks.
Carbon border adjustment mechanisms (CBAMs) appear to provide a way out of this dilemma for the growing number of jurisdictions that have made carbon pricing a cornerstone of their polices. By adding a tariff to the price of imports made in places that are not subject to a carbon price, CBAMs aim to preserve domestic climate gains by leveling the playing field between home-based producers that must pay the price and foreign competitors that do not.
This report begins by discussing the nexus of international trade and innovation. It then provides an overview of the mechanics of carbon pricing, the challenge of carbon “leakage” across borders, and CBAMs as a potential fix to that challenge. The next section covers the difficulties of implementing a CBAM, before considering how a CBAM-heavy trade regime might impact climate innovation. The report concludes by developing the “climate innovation club” concept as a promising alternative.