Exposure Of Chinese Exports To Potential Border Carbon Adjustments

As growth in trade continues to outstrip growth in GDP, attention has been directed to the CO₂ emissions that are embedded in traded goods and the interaction with carbon pricing policies.

In particular, concern has been raised that by implementing carbon prices, a country increases the cost of domestic production relative to imported goods, and in doing incentivizes changes in trade and / or production patterns to the detriment of domestic industry. It is possible that such changes could in turn lead to carbon leakage, as emissions reductions in the CO₂ constrained region are offset by increased emissions elsewhere.

In response, it has been suggested that given uneven implementation of carbon pricing policies, those countries that do choose to implement such measures would be advised to try and limit the distortions in consumption and production that arise from the resultant cost asymmetries. BCAs, which require payment of a tax or purchase of emissions certificates in line with carbon content of imports, are one such measure.

This brief quantifies the impact of existing proposals for BCAs on exports from China. It shows that not only are there many uncertainties regarding design detail, but also that these uncertainties can have a significant impact on the exposure of exports. Previous studies highlight that the products included, the CO₂ price applied, and the method for assessing the CO₂ content, are of key importance. These three considerations form the basis of the analysis.

The longer analysis on which this brief is based is available here.