Establishing Equivalence Between Taxes on Fossil Fuels and Carbon Prices Under Border Carbon Adjustments

Achieving net-zero emissions by 2050, as many countries have proposed to do, will require a steep increase in carbon prices. However, this may also imply a higher risk of carbon leakage. Border carbon adjustment (BCA) measures aim to prevent carbon leakage by charging a fee on imported carbon-intensive goods based on their greenhouse gas emissions and carbon pricing. In practice, BCAs exempt countries with similar emissions policies from import taxes, but do not take account of effectively equivalent regulations and often-high fossil fuel taxes imposed in third countries, with India being the highest (at 69 percent of the price). This policy brief recommends the G20 develop an approach to account for equivalent mechanisms to carbon prices, including regulations and high fuel taxes, when taxing imports under BCAs. The main idea is to establish equivalence between different policy approaches that meet the same objectives as BCAs. Any equivalence policy should also take account of the long-established principle of ‘common but differentiated responsibilities’.