How Border Carbon Adjustments Can Safeguard the Interests of Developing Countries

Border carbon adjustments (BCAs) are reshaping the global trade–climate interface and sparking renewed debate about the balance between environmental ambition and developmental equity. At the World Trade Organization and other international forums, developing countries have repeatedly raised concerns about the potential adverse impacts of BCAs on their economies and the consistency of such measures with the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC). For BCAs to be truly considered a success, they must be designed not as an impediment but as a positive contribution to a fair and inclusive global transition—one that builds trust rather than fuels division.

As BCAs move from concept to implementation, they raise several interlinked issues at the intersection of climate and development policy. Reflections below draw on IISD’s ongoing analysis and extensive engagement with policy-makers and stakeholders from a wide range of World Trade Organization members—including both BCA-implementing and other jurisdictions. It reflects, among others, insights from discussions held in Bellagio, Italy, with the support of the Rockefeller Foundation, as well as from IISD’s Global Stakeholder Dialogues: a process that brought together representatives from industry, labour, academia, and civil society across multiple countries to develop the Guidance on Border Carbon Adjustment, supported by the Laudes Foundation. These collective experiences highlight practical ways to integrate development considerations into BCA design and implementation.

How can BCAs factor in development dimensions?

Applying the CBDR-RC principle to BCAs means finding ways to reflect differing national capacities without weakening climate ambition. In practice, this could involve designing BCAs that take into account the realities faced by lower-income countries and smaller exporters, while still maintaining a level playing field and avoiding carbon leakage.

Blunt approaches, like blanket exemptions for entire economies, could create problematic incentives. They might enable loopholes that encourage production to shift toward exempted regions, undermining both fairness and environmental integrity, while locking such countries into a carbon-heavy future in a world that’s moving in the opposite direction.

Both developing countries and smaller producers need treatment that enables and supports their climate action, rather than excluding them from the markets covered by BCAs.

Revenue recycling can support multiple objectives, from helping developing countries comply with BCA requirements to accelerating their decarbonization. The idea is not new. In 2022, the European Parliament proposed using EU Carbon Border Adjustment Mechanism revenues to support developing country trading partners, but the final regulation instead allocated the revenues to the EU and its member states' budget. In the United Kingdom, the draft Carbon Border Adjustment Mechanism legislation treats the mechanism as a tax with revenues flowing to the general budget. In Australia, the Carbon Leakage Review suggested that revenues from a potential BCA could be used to support industrial decarbonization, “either domestically or in cooperation with international partners.” In the United States, the proposal for a Clean Competition Act suggested a federal carbon price paired with a border carbon adjustment, with part of the revenues dedicated to assisting developing countries in their decarbonization efforts. While direct revenue earmarking might be a challenge for most jurisdictions, a discussion on how such collected resources could—and should—be used internationally is still to be had.

BCA-implementing jurisdictions can play a central role by supporting broader decarbonization in developing countries. 

Helping partners lower emissions is often seen as a constructive option, as it both reduces future BCA liabilities and advances shared climate goals. Many efforts to mitigate climate change in developing countries come with a hefty price tag and require meaningful investments that governments cannot afford on their own. Next to financial support, technology transfer and diffusion can also play an important role in making such cooperation effective.

There may also be ways to lighten the burden of BCAs, specifically for developing countries or small firms. There have been some discussions about the differentiated crediting of carbon price paid in developing countries, giving greater recognition to carbon prices already paid in countries where the same price represents a heavier economic burden, perhaps adjusted for purchasing power.

At the firm level, BCAs could, for example, give small and medium-sized enterprises more time to comply through delayed reporting or payment obligations, as well as allowing for non-punitive defaults-based reporting or excluding small shipments from BCA obligations, as long as such exemptions are not used to circumvent the basic core rules.

How can support for developing countries mitigate the impact of BCAs?

Building compliance capacity will be essential to ensure that climate ambition in developing countries is properly credited. Many developing countries will need targeted capacity building to help their firms meet BCA requirements, particularly to develop emissions monitoring, reporting, and verification systems. Establishing such systems is a daunting task for companies that have never been required to provide emissions data related to their production and supply.

The challenge is to establish a mechanism that supports exporters’ compliance with a range of different BCAs currently under construction, thereby enabling exporters to continue accessing various markets. Multilateral instruments might benefit from pooled resources and can be more neutral when providing their support. Examples like the work of the World Trade Organization’s Standards and Trade Development Facility illustrate how technical assistance can help developing countries comply with standards in a neutral manner, not tied to any single bilateral trading relationship.

Yet the bilateral support programs should not be dismissed: there is a lot of potential in the integration of essential support in the existing or future projects by the traditional donors of development assistance that might not have had time yet to build this priority into their programs.

BCAs need not be inimical to CBDR-RC, but they require thoughtful, flexible design and structured international support to ensure they advance both global climate ambition and development imperatives.