A Comparison of the Design of Border Carbon Adjustments in the EU, the United Kingdom and Australia — Exploring measures to avoid confusion caused by disorderly proliferation —

In 2023, the European Union (EU) became the first jurisdiction in the world to legislate a carbon border adjustment mechanism (CBAM). A CBAM is a policy instrument under which a country or region that bears carbon pricing costs imposes taxes, levies, or similar charges on goods imported from other countries, with the aim of preventing carbon leakage to jurisdictions with less stringent climate policies. The United Kingdom has recently followed the EU in completing its legislation, and other countries, including Australia, are considering introducing such border carbon adjustments. This paper compares the design of the mechanisms that have been introduced or are under consideration in the EU, the United Kingdom, and Australia, and finds that they exhibit a mixture of commonalities and differences. The commonalities arise in three situations: where jurisdictions pursue similar designs in order to avoid risks associated with inconsistency with WTO rules; where later adopters align their designs with that of the EU, the first mover, in order to enhance interoperability; and where practical feasibility acts as a shared constraint that leads to convergence. The differences, by contrast, arise in cases such as the following: where a mechanism has been aligned with the jurisdiction's domestic carbon pricing system for reasons such as non-discrimination between domestic and imported products, resulting in circumstances where differences between domestic systems are projected onto the border adjustments; and where the differences reflect the underlying institutional architecture or policy-making process of each jurisdiction. To avoid disorder in the proliferation of border carbon adjustments, it will be necessary to maintain and expand elements that are common in their design and resolve existing differences to the extent possible, thereby reducing their trade-restrictive characteristics.