The Border Carbon Adjustment (BCA) is designed to address two key challenges: protecting EU industry from unfair competition and promoting wider adoption of effective carbon pricing.
When trading with regions with lower or no carbon price, imported goods are met with a carbon adjustment fee based on their CO2 footprint, and goods exported from the EU will receive a refund. This creates a fair international market and prevents the loss of industry to more polluting countries known as “leakage”. EU companies can then compete on a level playing field with their international competitors.
It is possible to limit implementation costs by reducing the scope of the BCA to goods classed as Energy Intensive and Trade Exposed, commonly referred to as EITE (eg. steel, concrete, paper, ceramics and chemicals such as fertilizers). This reduces the quantity of goods to be monitored.
Border Carbon Adjustments are compatible with WTO-rules under both Gatt article II.2 and III.2 (The German Marshall Fund of the United States, 2013). It is additionally established in principle under Gatt article XX paragraphs (b) and (g) as seen in the Montreal Protocol related to ozone layer depletion. This jurisprudence has confirmed that WTO rules do not trump environment. To gain de facto legitimacy, concerted adoption by major players is prefered.
The BCA creates economic leverage promoting wider policy adoption of compatible carbon pricing. Trading partners are incentivised to adopt matching carbon pricing in order to retain the carbon pricing revenues within their own economies.