Carbon taxes and international trade: What are the key issues?

Recent proposals in the European Union and the United States to impose border adjustments on certain imports from heavy carbon emitters, while in the early stages and likely to face challenges, represent new initiatives to address climate change — the use of established trade mechanisms. These efforts have attracted the attention of countries such as China and Russia that could be affected considerably by such adjustments.

Mechanisms such as the EU’s ‘cap-and-trade’ Emissions Trading Scheme (ETS) have been in place for many years. The EU and the United States now are considering new proposals generally known as carbon border taxes or border adjustments — levies on imports based on the amount of carbon emissions resulting from production of the product in question. These measures, at least in the case of the EU proposal, are aimed in part at reducing ‘carbon leakage’ — the relocation by businesses from countries that have enacted measures to reduce carbon emissions to other countries with looser standards. They also are a means of incentivizing/penalizing countries deemed to be insufficiently addressing the issue of climate change.

Source PwC

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