Accounting for Greenhouse Gas Emissions in International Trade

As nations prepare for COP26 by proposing ambitious long-term climate goals, the implications for trade among nations with increasingly different climate goals and policies are back in focus. Border adjustments—which involve rebates on exports and charges on imports based on the greenhouse gas intensity of products—are a potential policy option to limit leakage and competitiveness losses that would result from production shifting to nations with weaker climate policies.

In two papers out today, RFF researchers Brian Flannery and Jan Mares explore ways in which companies and governments could determine border adjustments based on a greenhouse gas (GHG) index for covered products. The working papers build on the framework for border tax adjustments published by Flannery, Mares, and colleagues in October 2020.

The framework introduced the index as a central concept and administrative procedure to resolve the challenge of allocating emissions from facilities and their supply chains to products. Well-established, reliable methods have been used for decades to determine and report GHG emissions from facilities. However, border adjustments apply to products, not to the facility that creates them. The GHG index was designed to solve that challenge.

In describing the new research, Flannery commented, “As we developed the papers, it became increasingly clear that evaluating GHG indexes as called for in the framework is simply a matter of accounting for known or knowable information. Much of the required data is already reported in the United States and many other nations today.”

“The United States needs a fair system in place from the get-go,” coauthor Mares added. “That’s where our papers come in. We offer suggestions on ways the United States could hit the ground running both to issue export rebates and impose import charges.”

The papers also discuss how the index could relate to the recent border adjustment proposals from the European Union and the United States based on regulations rather than a tax. These policies, which would impose import charges on goods from nations with less ambitious climate policies, face strong political opposition from many countries—especially major developing countries—and challenges regarding compatibility with rules established by the World Trade Organization (WTO).

“We devised WTO-acceptable border adjustments based on a GHG tax, but we also believe that the index can be relevant to border adjustments based on regulations—if such policies were acceptable to the WTO,” Mares said.

Flannery added, “We suggest that the index should be considered as the basis for a common international metric to account for border adjustments of traded GHG-intensive goods.”

For more, read the new working papers, “Determining the Greenhouse Gas Index for Covered Products of Specific Manufacturers,” and “Export Rebates and Import Charges for Border Tax Adjustments under an Upstream US Greenhouse Gas Tax: Estimates and Methods,” by RFF Visiting Fellow Brian Flannery and Senior Advisor Jan Mares. Read Flannery’s corresponding blog post for Resources here.