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Border carbon adjustments in support of domestic climate policies : explaining the gap between theory… Pauer, Stefan U. 2019

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 Border Carbon Adjustments in Support of Domestic Climate Policies: Explaining the Gap Between Theory and Practice  by  STEFAN U. PAUER   A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF  DOCTOR OF PHILOSOPHY  in  The Faculty of Graduate and Postdoctoral Studies (Law)   THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver)  October 2019  © Stefan U. Pauer, 2019  ii The following individuals certify that they have read, and recommend to the Faculty of Graduate and Postdoctoral Studies for acceptance, the dissertation entitled:  Border Carbon Adjustments in Support of Domestic Climate Policies: Explaining the Gap Between Theory and Practice  submitted by Stefan U. Pauer  in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Law   Examining Committee: David G. Duff, Law Co-supervisor Kathryn Harrison, Political Science Co-supervisor  Carol McAusland, Land and Food Systems Supervisory Committee Member Philippe Le Billon, Geography University Examiner Stepan Wood, Law University Examiner  iii Abstract A growing number of scholars, environmentalists, politicians, and business leaders have recommended border carbon adjustments (BCAs) to support domestic climate policies. BCAs can levy a domestic carbon price on imports. By extending domestic policies beyond a jurisdiction’s boundaries, BCAs can put domestic and foreign industries on a level playing field, counter carbon leakage, and incentivize other jurisdictions to take climate action. In theory, BCAs offer the promise of environmental, economic, and political benefits. However, despite their potentially substantial benefits and backing from prominent leaders, BCAs are largely absent in practice. Although an increasing number of carbon-pricing policies have been adopted throughout the world, very few examples of BCAs exist, and so far none have been implemented at a general scale in any jurisdiction. In order to explain this puzzle and investigate the conditions under which policy-makers do, or do not, adopt and implement BCAs, this research empirically tests a series of hypotheses using four case studies of experiences with BCAs in the European Union (EU) and in California. The case studies comprise the inclusion of international flights in the EU’s cap-and-trade system, stationary installations in this system, the inclusion of electricity imports in California’s cap-and-trade program, and industrial facilities in this program. This research draws on information from 43 expert interviews and a wide range of published materials, including quantitative data. The research finds several barriers that prevent the adoption and implementation of BCAs in practice. Policy-makers are likely to meet domestic political opposition to BCAs, may run into opposition from other governments, and may encounter concerns about the circumvention of BCAs. In fact, domestic industry stakeholders overwhelmingly oppose BCAs since they prefer alternative measures, such as free allocation of emission allowances. They also oppose because BCAs may result in a stakeholder’s increased exposure to carbon pricing, and export-oriented industries fear trade war and retaliation from other jurisdictions. Therefore, the circumstances in which BCAs may be implemented successfully, and thus the scope for applying BCAs in practice, appear to be more narrow than acknowledged in the literature.  iv Lay Summary Many scholars, environmentalists, politicians, and business leaders recommend “border carbon adjustments” (BCAs), a type of government policy that helps reduce greenhouse gas emissions. In theory, BCAs have several environmental, economic, and political benefits, but BCAs are rare in practice. Drawing on 43 expert interviews and other materials, this research investigates this contradiction through the analysis of four cases in which BCAs have been considered, and sometimes applied, in the European Union and California. This study finds that governments often face local and foreign opposition to BCAs. Governments also struggle to prevent companies from bypassing the policy. Most companies prefer other policies rather than BCAs. For these reasons, governments do not often apply BCAs and use other policies instead. This study contributes to the development of effective government policy to address climate change.  v Preface This dissertation is original, unpublished, independent work by the author, Stefan U. Pauer. The University of British Columbia’s Behavioural Research Ethics Board approved the research for this project (certificate number: H14-02794). Parts of chapter 5 have been published as follows: Pauer, Stefan U. “Including Electricity Imports in California’s Cap-and-Trade Program: A Case Study of a Border Carbon Adjustment in Practice” (2018) 31:10 The Electricity Journal 39. Parts of chapters 1, 2, and 7 have been published as follows: Pauer, Stefan U. “Border Carbon Adjustments in Support of Domestic Climate Policies: Explaining the Gap Between Theory and Practice” (2019) Smart Prosperity Institute, Working Paper 19-05. Lastly, a policy brief based on findings in chapter 7 has been published: Pauer, Stefan U. “Border Carbon Adjustments: A Policy Brief” (2019) Smart Prosperity Institute, Working Paper 19-04.  vi Table of Contents Abstract .................................................................................................................................... iii	Lay Summary ........................................................................................................................... iv	Preface ....................................................................................................................................... v	Table of Contents ..................................................................................................................... vi	List of Tables ............................................................................................................................ xi	List of Abbreviations ............................................................................................................... xii	Acknowledgements ................................................................................................................ xiv	Dedication .............................................................................................................................. xvi	1	 Introduction: The Puzzle of Border Carbon Adjustments ..................................................... 1	1.1	 Context ........................................................................................................................ 1	1.2	 Research Objective ...................................................................................................... 3	1.3	 Research Method ......................................................................................................... 5	1.4	 Outline of Dissertation ................................................................................................ 8	2	 The Promise and Problems of Border Carbon Adjustments ............................................... 10	2.1	 Introduction ............................................................................................................... 10	2.2	 Potential Benefits of BCAs ....................................................................................... 11	2.2.1	 Safeguarding Competitiveness, Reducing Loss of Jobs, Countering Policy-Induced Carbon Leakage .............................................................................. 12	2.2.2	 Countering Demand-Driven Carbon Leakage .............................................. 18	2.2.3	 Lessening Domestic Political Opposition to Climate Policies ..................... 21	2.2.4	 Incentivizing Other Jurisdictions to Take Climate Action ........................... 23	2.3	 Potential Barriers to BCAs ........................................................................................ 26	2.3.1	 Concerns about WTO Law or Other Legal Limitations ............................... 27	2.3.2	 Practical Concerns ........................................................................................ 36	2.3.2.1	 Administrative Complexity ............................................................... 36	2.3.2.2	 Effectiveness of BCAs in Achieving Their Potential Benefits ......... 38	2.3.3	 Concerns about Repercussions for International Relations .......................... 40	2.3.3.1	 Fear of Trade War and Retaliation .................................................... 41	2.3.3.2	 Fear of Hampering International Climate Efforts ............................. 43	 vii 2.3.4	 Alternative Measures .................................................................................... 45	2.3.5	 Domestic Political Opposition ...................................................................... 48	2.4	 Discussion ................................................................................................................. 51	2.5	 Conclusion ................................................................................................................ 54	3	 The Inclusion of International Flights in the European Union Emissions Trading System 56	3.1	 Introduction ............................................................................................................... 56	3.2	 Chronological Overview and Policy Details ............................................................. 58	3.3	 Concerns about WTO Law ........................................................................................ 66	3.4	 Practical Concerns ..................................................................................................... 70	3.4.1	 Administrative Complexity ........................................................................... 70	3.4.2	 Effectiveness in Reducing Emissions ........................................................... 72	3.5	 Alternative Measures ................................................................................................ 73	3.6	 Concerns about Repercussions for International Relations ...................................... 74	3.6.1	 Fear of Trade War and Retaliation ............................................................... 74	3.6.1.1	 Threats and Retaliatory Measures by Third Countries ...................... 75	3.6.1.2	 Impact of Third Country Opposition ................................................. 81	3.6.2	 Fear of Hampering International Climate Efforts ......................................... 86	3.7	 Domestic Political Opposition .................................................................................. 88	3.7.1	 EU Stakeholders and Their Positions ........................................................... 88	3.7.2	 Impact of EU Stakeholder Opposition .......................................................... 94	3.8	 Conclusion ................................................................................................................ 98	4	 Border Carbon Adjustments for Stationary Installations in the European Union Emissions Trading System .................................................................................................................. 100	4.1	 Introduction ............................................................................................................. 100	4.2	 Chronological Overview and Policy Details ........................................................... 101	4.3	 Concerns about WTO Law ...................................................................................... 104	4.4	 Practical Concerns ................................................................................................... 108	4.4.1	 Administrative Complexity ......................................................................... 108	4.4.2	 Effectiveness ............................................................................................... 114	4.5	 Concerns about Repercussions for International Relations .................................... 115	4.5.1	 Fear of Trade War and Retaliation ............................................................. 115	 viii 4.5.1.1	 Threats of Retaliation by Third Countries ....................................... 115	4.5.1.2	 Impact of Third Country Opposition ............................................... 117	4.5.2	 Fear of Hampering International Climate Efforts ....................................... 125	4.6	 Alternative Measures .............................................................................................. 130	4.7	 Domestic Political Opposition ................................................................................ 135	4.7.1	 EU Stakeholders and Their Positions ......................................................... 136	4.7.2	 Impact of EU Stakeholder Opposition ........................................................ 144	4.8	 Conclusion .............................................................................................................. 146	5	 The Inclusion of Electricity Imports in California’s Cap-and-Trade Program ................. 148	5.1	 Introduction ............................................................................................................. 148	5.2	 Chronological Overview and Policy Details ........................................................... 150	5.3	 Concerns about WTO Law or the US Dormant Commerce Clause ........................ 156	5.3.1	 Concerns about WTO Law ......................................................................... 157	5.3.2	 Concerns about the US Dormant Commerce Clause .................................. 159	5.4	 Concerns about Repercussions for International or US State-Level Relations ....... 164	5.4.1	 Fear of Trade War and Retaliation ............................................................. 165	5.4.1.1	 No Opposition from Other Governments ........................................ 165	5.4.1.2	 Reasons for Absence of Opposition ................................................ 167	5.4.2	 Fear of Hampering International or US State-Level Climate Efforts ......... 172	5.5	 Alternative Measures .............................................................................................. 173	5.6	 Practical Concerns ................................................................................................... 175	5.6.1	 Administrative Complexity ......................................................................... 176	5.6.2	 Effectiveness in Achieving Emissions Reductions ..................................... 180	5.6.2.1	 Concept of Resource Shuffling ....................................................... 181	5.6.2.2	 Initial Policy Approach and Criticism ............................................. 184	5.6.2.3	 Revised Policy Approach ................................................................ 187	5.6.2.4	 Impact on the Effectiveness of the BCA in Achieving Emissions Reductions ....................................................................................... 190	5.7	 Domestic Political Opposition ................................................................................ 195	5.8	 Conclusion .............................................................................................................. 202	 ix 6	 Border Carbon Adjustments for Industrial Facilities in California’s Cap-and-Trade Program ............................................................................................................................. 204	6.1	 Introduction ............................................................................................................. 204	6.2	 Chronological Overview and Policy Details ........................................................... 206	6.3	 Concerns about WTO Law or the US Dormant Commerce Clause ........................ 210	6.3.1	 Concerns about WTO Law ......................................................................... 210	6.3.2	 Concerns about the US Dormant Commerce Clause .................................. 214	6.4	 Practical Concerns ................................................................................................... 218	6.4.1	 Administrative Complexity ......................................................................... 218	6.4.2	 Effectiveness of BCAs in Countering Carbon Leakage ............................. 224	6.5	 Concerns about Repercussions for International or US State-Level Relations ....... 225	6.5.1	 Fear of Trade War and Retaliation ............................................................. 225	6.5.2	 Fear of Hampering International or US State-Level Climate Efforts ......... 227	6.6	 Alternative Measures .............................................................................................. 228	6.6.1	 Free Allocation and Relation to BCAs ....................................................... 229	6.6.2	 Attitudes towards Alternatives .................................................................... 231	6.6.3	 Explanation of Preferences for Free Allocation ......................................... 234	6.6.3.1	 Economic Effects on Downstream Product Prices .......................... 234	6.6.3.2	 Generosity and Ensuing Inertia of Free Allocation ......................... 238	6.6.4	 Summary ..................................................................................................... 243	6.7	 Domestic Political Opposition ................................................................................ 244	6.7.1	 Stakeholders and Their Positions ................................................................ 245	6.7.2	 Impact of Stakeholder Attitudes ................................................................. 251	6.8	 Conclusion .............................................................................................................. 254	7	 Conclusion: The Narrow Scope for Applying Border Carbon Adjustments in Practice ... 256	7.1	 Introduction ............................................................................................................. 256	7.2	 Legal Concerns ........................................................................................................ 258	7.3	 Practical Concerns ................................................................................................... 259	7.3.1	 Administrative Complexity ......................................................................... 259	7.3.2	 Effectiveness in Achieving the Potential Benefits of a BCA ..................... 260	7.4	 Concerns about Repercussions for Governmental Relations .................................. 261	 x 7.4.1	 Fear of Trade War and Retaliation ............................................................. 261	7.4.2	 Fear of Hampering International Climate Efforts ....................................... 264	7.5	 Alternative Measures .............................................................................................. 264	7.6	 Domestic Political Opposition ................................................................................ 266	7.7	 Discussion ............................................................................................................... 268	7.8	 Conclusion .............................................................................................................. 272	Bibliography .......................................................................................................................... 277	  xi List of Tables Table 1: Potential benefits of and barriers to BCAs ................................................................ 52	Table 2: Domestic stakeholder positions in the EU aviation case .......................................... 89	Table 3: Domestic stakeholder positions in the EU stationary installations case ................. 139	Table 4: International trade in goods of California in 2016 .................................................. 167	Table 5: Domestic stakeholder positions in the California electricity case .......................... 199	Table 6: Domestic stakeholder positions in the California industrial facilities case ............ 245	Table 7: Barriers to adopting and implementing BCAs in each case .................................... 257	  xii List of Abbreviations AB Assembly Bill AEA Association of European Airlines ARB Air Resources Board BCA Border carbon adjustment CalChamber California Chamber of Commerce CEFIC European Chemical Industry Council CEO Chief executive officer CEPI Confederation of European Paper Industries CMTA California Manufacturers & Technology Association CSCME Coalition for Sustainable Cement Manufacturing & Environment DCC Dormant Commerce Clause EDF Environmental Defense Fund EEA European Economic Area EITE Energy-intensive and trade-exposed ELFAA European Low Fares Airline Association ERA European Regions Airline Association ETS Emissions Trading System EU European Union FERC Federal Energy Regulatory Commission GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP Gross domestic product ICAO International Civil Aviation Organization IEP Independent Energy Producers Association LADWP Los Angeles Department of Water and Power LCFS Low-carbon fuel standard MRV Monitoring, reporting, and verification NGO Environmental non-governmental organization  xiii NRDC Natural Resources Defense Council PG&E Pacific Gas and Electric PPM Process and production method PUC Public Utilities Commission RGGI Regional Greenhouse Gas Initiative SB Senate Bill SCE Southern California Edison SCPPA Southern California Public Power Authority SDGE San Diego Gas & Electric UNFCCC United Nations Framework Convention on Climate Change US United States WSPA Western States Petroleum Association WTO World Trade Organization WWF World Wide Fund for Nature  xiv Acknowledgements I would like to thank the members of my supervisory committee – Kathryn Harrison, David Duff, and Carol McAusland – for their guidance and advice, encouragement and support, and constructive feedback on my academic work. I am grateful to the following organizations and individuals for their interest in and financial support of my research: the Centre for International Governance Innovation (CIGI); the Economics and Environmental Policy Research Network (EEPRN), which is supported by Environment and Climate Change Canada (ECCC); the Pacific Institute for Climate Solutions (PICS); the Peter A. Allard School of Law at the University of British Columbia (UBC); the UBC Public Scholars Initiative; and particularly Oonagh Fitzgerald, Geoff McCarney, Sara Muir-Owen, and Susan Porter. I also thank my research participants for volunteering their time to share their valuable perspectives and experiences with me. More generally, I appreciate the rigorous education and learning opportunities I have benefitted from in Canada and specifically at UBC. I am grateful also to the following individuals at UBC: Ljiljana Biukovic for supporting me academically and for caring; Joanne Chung for her superb assistance with everything related to navigating my degree and her pleasant company over coffee; Kurt Hübner for the academic opportunities he provided; Karin Mickelson for supporting my application to the doctoral program, and for her general kindness and support; Jenny Phelps for her advice in the early stages of my degree; Angelique Pilon for being a supportive manager and for sharing positive feedback; and Henry Yu for his kindness and support. I also express my gratitude to a number of mentors and former managers: Thomas Cottier for his wisdom and inspiration, for choosing to send me to UBC on the student exchange that changed my life, and for supporting my applications to the European Commission’s traineeship program and UBC’s doctoral program; Mark Jaccard for being a down-to-earth, academic role model and source of inspiration, and for encouraging me to think critically; Hans Bergman and Yvon Slingenberg for their mentorship and for making my professional experience at the European Commission so rewarding; and Roland  xv Grossrieder and Gundula Heinatz for being supportive managers and motivators in one of my earliest professional experiences. I thank Sheri Bakker, Alison Hamper, and Diane Lacaille for their kindness and emotional support. I also thank the palliative care leadership team at Providence Health Care – particularly Sarah Cobb, Ella Garland, and Gil Kimel – for their encouragement and appreciation of my contributions as a patient and family representative. I am thankful to the following individuals for their valuable friendship: Adrián, Bez, Edgar, Erika, Illiana, Jean-Simon, Jorge, Justin and Jane, Marcin, Mark, Mina, Ricardo, Sara and Ciccio, Sarah, Sheng and Sophie, and Steph. I thank my treasured family for their unconditional love and unwavering support: my parents, my brother, my Austrian, Danish, and two Mexican families, including those no longer physically with us. I am deeply grateful to those already mentioned who went above and beyond in supporting me emotionally, financially, and practically during the most difficult time of going through Vanessa’s illness and death. I will always remember both the hardship of losing her and the kindness I received. Vanessa – thank you for shaping my life in beautiful ways that continue to reward and inspire me. I have learned so much from you. Thank you for being part of my life. I will always keep you in my heart. Oralia – what a blessing to have your precious presence by my side. Thank you for making my life joyful, colourful, and rewarding; for helping me grow as a professional and as a person; for your emotional, practical, and intellectual support; for facing the difficult questions together with me and for tackling them jointly; for your kindness, bravery, and tender love; for choosing to navigate this life with me. I thank the universe for bringing us together. June 2019  xvi Dedication     Dedicated to  Oralia & Vanessa †  1 1 Introduction: The Puzzle of Border Carbon Adjustments 1.1 Context A growing number of scholars, environmentalists, politicians, and business leaders have recommended border carbon adjustments (BCAs)1 to support domestic climate policies, particularly market-based instruments for carbon pricing, namely carbon taxes and cap-and-trade systems. BCAs are trade measures that equalize different levels of carbon prices between trading partners. Specifically, to put domestic and foreign industries on a level playing field, BCAs levy a domestic carbon price on imported goods.2 In doing so, BCAs extend such climate policies beyond the domestic domain. Correspondingly, although symmetry is not required,3 a domestic carbon price can also be rebated for exported goods to support the competitiveness of domestic producers on foreign markets.4 While ordinary tariffs may be based on the value of a good, BCAs are based on the amount of greenhouse gas emitted during the production of a good. For example, the charge for a tonne of cement would be based on the amount of CO2 and other greenhouse gases emitted during its production. This way, a jurisdiction applying a symmetric BCA would levy its domestic carbon price on imports of cement and provide a rebate of the carbon price to domestically-produced cement that is destined for export.5                                                1 Other terms used in the literature include border tax adjustments (BTAs), border adjustments (BAs), border adjustment measures (BAMs), border carbon measures (BCMs), border tax measures (BTMs), carbon border adjustments (CBAs), carbon border measures (CBMs), carbon border taxes (CBTs), and carbon tariffs. 2 In principle, BCAs could also be used for trade in services. Because domestic climate policies have concentrated on reducing emissions from manufacturing industries, this dissertation focuses on BCAs for goods. 3 Gary Clyde Hufbauer, Steve Charnovitz & Jisun Kim, Global Warming and the World Trading System (Washington, DC: Peterson Institute for International Economics, 2009) at 39. 4 See e.g. Mikael Skou Andersen, “Border Adjustment With Taxes or Allowances to Level the Price of Carbon” in Mona Hymel et al, eds, Innovation Addressing Climate Change Challenges: Market-Based Perspectives (Cheltenham: Edward Elgar, 2018) 20; Susanne Droege, “Using Border Measures to Address Carbon Flows” (2011) 11:5 Climate Policy 1191; Michael Mehling et al, “Beat Protectionism and Emissions at a Stroke” (2018) 559 Nature 321. Unless otherwise indicated, in this dissertation the term BCA refers to measures that comprise both import charges and export rebates. 5 See also General Agreement on Tariffs and Trade, Report by the Working Party on Border Tax Adjustments (1970), GATT Doc L/3464, BISD 18S/97, which defines border adjustments in general as “any fiscal measures which put into effect, in whole or in part, the destination principle” (at para 4).  2 BCAs offer the promise of environmental, economic, and political benefits. In protecting the competitiveness of domestic industries relative to peers in jurisdictions with more lenient standards, these measures can avoid negative economic consequences, increase environmental benefits by countering carbon leakage,6 and, in doing so, build greater political support for domestic carbon pricing or regulation. What is more, depending on their design, BCAs may even incentivize other jurisdictions to implement their own climate policies or join international efforts to cut emissions.7 Perhaps unsurprisingly, numerous leaders have advocated the use of BCAs. Notable individuals that have called for such measures include economists and Nobel Prize winners Paul Krugman8 and Joseph Stiglitz,9 climate scientist and activist James Hansen,10 former United States (US) Secretary of Energy and Nobel Prize winner Steven Chu,11 French President Emmanuel Macron,12 former French Presidents Jacques Chirac13 and Nicolas Sarkozy,14 former French Prime Minister Dominique de Villepin,15 former Italian Prime                                                6 See e.g. Christoph Böhringer, Edward J Balistreri & Thomas F Rutherford, “The Role of Border Carbon Adjustment in Unilateral Climate Policy: Overview of an Energy Modeling Forum Study (EMF 29)” (2012) 34 Energy Economics S97. 7 See e.g. Tracey Epps & Andrew Green, Reconciling Trade and Climate: How the WTO Can Help Address Climate Change (Cheltenham: Edward Elgar, 2010). 8 Paul Krugman, “Building a Green Economy”, The New York Times (7 April 2010), online: The New York Times <https://www.nytimes.com/>. 9 Joseph E Stiglitz, “A New Agenda for Global Warming” (2006) 3:7 The Economists’ Voice. 10 Eric Holthaus, “The Point of No Return: Climate Change Nightmares Are Already Here”, Rolling Stone (5 August 2015), online: Rolling Stone <https://www.rollingstone.com/>; Michael Hopkin, “James Hansen: Emissions Trading Won’t Work, But My Global ‘Carbon Fee’ Will”, The Conversation (2 December 2015), online: The Conversation <http://theconversation.com/>. 11 Ian Talley & Tom Barkley, “Energy Chief Says U.S. Is Open to Carbon Tariff”, The Wall Street Journal (18 March 2009), online: The Wall Street Journal <https://www.wsj.com/>; “’Geht auch ohne die USA’”, Österreichischer Rundfunk (30 November 2016), online: ORF <https://orf.at/>. 12 Raquel Guerra, “Macron Vows to Put Climate ‘at the Heart of the EU Project’”, ENDS Europe (26 April 2019), online: ENDS Europe <http://www.endseurope.com/>; Jean Chemnick, “Quitting Paris? Pay a Carbon Tax, Macron Says”, E&E News (4 December 2018), online: E&E News <https://www.eenews.net/>; Neil Roberts, “France Calls for EU Carbon Floor Price and Border Tariff”, ENDS Europe (22 March 2018), online: ENDS Europe <http://www.endseurope.com/>. 13 Cited in Joost Pauwelyn, “Carbon Leakage Measures and Border Tax Adjustments under WTO Law” in Geert Van Calster & Denise Prévost, eds, Research Handbook on Environment, Health and the WTO (Cheltenham: Edward Elgar, 2013) 448 at 458. 14 Mike Szabo, “Europe Should Hit US With Carbon Tariffs for Paris Withdrawal -Sarkozy”, Carbon Pulse (14 November 2016), online: Carbon Pulse <http://carbon-pulse.com/>; “France Says EU Nations Would Back   3 Minister Silvio Berlusconi,16 former European Union (EU) Commissioner Günter Verheugen,17 and Michael Morris, former Chief Executive Officer (CEO) of American Electric Power.18 However, success in implementing BCAs has proven largely elusive to date. BCAs are conspicuously absent in practice – despite their backing from prominent leaders and their potentially substantial benefits. Indeed, although an increasing number of carbon-pricing policies have been adopted throughout the world,19 very few examples of BCAs exist, and so far none have been implemented at a general scale in any jurisdiction.20 1.2 Research Objective This puzzle raises the question of what barriers there are to adopting and implementing BCAs. There appears to be a significant gap between extant theory and practice on the use of BCAs, which gives rise to the following research question: Why, given the benefits of using BCAs described in the literature and their backing from prominent leaders, have policy-makers not embraced these measures? A number of hypotheses are conceivable that may explain the apparent lack of BCAs in practice: (1) there may be concerns about the ability of BCAs to comply with World Trade                                                                                                                                                  CO2 Border Tax”, Bloomberg Businessweek (26 March 2010), online: Bloomberg Businessweek <https://www.bloomberg.com/>, cited in Pauwelyn, supra note 13 at 458. 15 “Dominique de Villepin Propose une Taxe sur le CO2 des Produits Importés”, Le Monde (13 November 2006), online: Le Monde <https://www.lemonde.fr/>. 16 “Italy Joins French Calls for EU Carbon Tariff”, EurActiv (16 April 2010), online: EurActiv <http://www.euractiv.com/>. 17 EU, European Commission, Letter from Commissioner for Enterprise and Industry Günter Verheugen to President José Manuel Barroso (21 November 2006). 18 Michael Morris & Edwin Hill, “Trade Is the Key to Climate Change”, The Energy Daily (20 February 2007), online: The Energy Daily <https://www.theenergydaily.com/>, cited in Pauwelyn, supra note 13 at 458. 19 See e.g. World Bank, State and Trends of Carbon Pricing 2018 (Washington, DC: World Bank, 2018). 20 Pauwelyn, supra note 13 at 458; also Aaron Cosbey et al, “Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature” (2019) 13:1 Review of Environmental Economics and Policy 3 at 4; Michael Mehling et al, “Designing Border Carbon Adjustments for Enhanced Climate Action” (2017) Climate Strategies, Working Paper at 9; David G Victor, Global Warming Gridlock: Creating More Effective Strategies for Protecting the Planet (Cambridge: Cambridge University Press, 2011) at 85.  4 Organization (WTO) law or other legal provisions; (2) practical concerns may exist about the administrative complexity and the effectiveness of BCAs to achieve their potential benefits; (3) there may be concerns about repercussions for international relations, such as fears of trade war and retaliation or that BCAs could hamper international climate efforts by reducing jurisdictions’ willingness to cooperate; (4) policy-makers and stakeholders could prefer alternative measures that may be less controversial and may offer other advantages; (5) domestic political opposition may outweigh political demand for BCAs due to negative economic impacts from these measures or due to strategic opposition. The objective of this research is to understand the conditions under which policy-makers do, or do not, adopt and implement BCAs. While there has been occasional speculation in the literature about the reasons BCAs are not implemented more widely in practice, to date no study has subjected this puzzle to specific, empirical analysis that focuses on actual decisions taken by policy-makers on the ground. This study seeks to fill that gap. At the same time, this research also aims to provide policy-makers with lessons learned from experiences with BCAs in practice to help inform their decision-making. To foreshadow some of the research findings, there are several barriers that prevent the adoption and implementation of BCAs in practice. The evidence shows that policy-makers are likely to meet domestic political opposition to BCAs, may run into opposition from other governments, and may encounter concerns about the circumvention of BCAs. In fact, domestic industry stakeholders overwhelmingly oppose BCAs since they prefer alternative measures, such as free allocation of emission allowances. This is because export-oriented industries fear trade war and retaliation from other jurisdictions, and because BCAs may result in a stakeholder’s increased exposure to carbon pricing. Therefore, the circumstances in which BCAs may be implemented successfully, and thus the scope for applying BCAs in practice, appear to be more narrow than acknowledged in the literature. The next part of this introduction addresses how this research was carried out. It also briefly considers the study’s contribution to both scholarship and policy-making practice.  5 1.3 Research Method In order to determine the conditions under which policy-makers do, or do not, adopt and implement BCAs, this study empirically tests the above-mentioned hypotheses using four case studies. Applying a systematic analytical approach across all cases, this research compares the following experiences with and attitudes towards BCAs in the EU and in California: (1) the inclusion of international flights in the EU’s cap-and-trade system, (2) stationary installations in the EU’s cap-and-trade system, (3) the inclusion of electricity imports in California’s cap-and-trade program, and (4) industrial facilities in California’s cap-and-trade program. These cases comprise the only known examples of limited BCA development in the world so far.21 Both jurisdictions – the EU and California – represent major economies that have large-scale carbon-pricing policies in place. In 2015, for instance, the EU and California had a gross domestic product (GDP) of $16.4tn and $2.6tn, respectively.22 In that year, the emissions coverage of the EU’s cap-and-trade system was 2,009 Mt CO2-eq,23 while that of California’s cap-and-trade program was 395 Mt CO2-eq.24 Because experiences with BCAs have been limited to cap-and-trade systems to date, no carbon taxes have been studied in this research. This case selection enables the analysis of experiences with and attitudes towards BCAs across different political and legal systems, and levels of jurisdiction. Furthermore, these cases include examples of both limited adoption and rejection of BCAs as well as intermediate policy outcomes within cases. When including the aviation sector in its cap-and-trade system, the EU adopted a measure that was comparable to a BCA, although it                                                21 Note that it is unclear if BCAs have been the subject of sufficiently significant deliberation among policy-makers and stakeholders in other jurisdictions that have applied carbon-pricing policies to date. A minimum level of consideration of BCAs would be required to enable the study of any such policy developments. 22 World Bank, “GDP (Current US$)”, online: World Bank Open Data <https://data.worldbank.org/> (retrieved 23 August 2018); US, Bureau of Economic Analysis, “Gross Domestic Product (GDP) by State”, online: BEA <https://www.bea.gov/> (retrieved 30 May 2018). These figures are in current US dollars. 23 See EU, European Commission, “Emissions Trading: Questions and Answers Concerning the Second Commission Decision on the EU ETS Cap for 2013 (October 2010)”, online: European Commission <http://ec.europa.eu/> (retrieved 8 March 2019). 24 US, Cal Code Regs tit 17 § 95841 (2011).  6 suspended that measure subsequently. By contrast, the EU foresees no BCAs for stationary installations in its cap-and-trade system. California’s cap-and-trade program includes imports of electricity, although policy-makers weakened this form of BCA during implementation. Lastly, California does not apply any BCAs for industrial facilities under its cap-and-trade program. This variation both across jurisdictions and over time within jurisdictions provides analytical leverage to understand the impact of various factors on the choice to use or not use BCAs, including stakeholder interests, political institutions, and policy-makers’ views on and attitudes towards these measures. In order to understand what actually happened in policy debates in each jurisdiction, it is essential to speak with those who participated in these discussions, including senior government officials and experts from business, industry, and the environmental community. Therefore, this research draws on information from 43 expert interviews and a wide range of published materials, including scholarly literature from different disciplines, government documents, and newspaper articles, as well as quantitative data from extant economic modelling and international trade statistics. At times, it proved challenging to retrieve evidence from publicly available materials in addition to information collected through interviews for understanding the policy choices made and strategies pursued by policy-makers and stakeholders. This is both due to the politically sensitive nature of this research and because it often concerns intricate technical questions of policy design that may not be found in publicly available documents. These constraints reinforce the importance of speaking with those who participated in the relevant political processes. Wherever possible, the evidence drawn on for this study was corroborated through multiple sources and documentary materials. In total, 43 individuals were interviewed for this study. This includes 14 government officials, 13 industry representatives, five representatives of the environmental community, six academics, and five other experts.25 For the two EU case studies, 18 individuals were consulted in person in Brussels, Belgium, between October and November 2015, while four                                                25 Because industry interests were advocated by various associations representing individual sectors, more industry associations than environmental organizations were present both in the EU and in California.  7 interviews were conducted over the phone in June 2016 and November 2017. For the two California case studies, 10 individuals were consulted in person in Sacramento, California, in October 2017, while 11 interviews were conducted over the phone between October and November 2017 and in August 2018. The interviews were semi-structured and lasted between 30 minutes and two hours, with an average duration of one hour. While the interviewees informed the research through their statements, the participants do not necessarily endorse the conclusions reached in this research. Each interviewee had the option to be interviewed on the record or maintain confidentiality. In the latter case, interviewees could specify how they wished to be referred to should information or quotes be used from the interview. Interviewees who had requested to review their statements before the publication of this research were given the opportunity to do so. The interviewees were selected for inclusion in this research based on their involvement in relevant policy debates in the EU and California. They were identified through public records, including media coverage and websites of government departments, business, industry, and environmental groups. The University of British Columbia’s Behavioural Research Ethics Board approved the research for this project. The author’s experience with these interviews was illustrative of the politically sensitive nature of this research. Some of the interviewees both declined to be recorded during the interview and allowed information conveyed in the interview to be used only subject to explicit approval afterwards. In most of these cases, the interviewees did not consent to their statements being published in this dissertation. Wherever possible, other sources were drawn on to convey the information from such interviews. By investigating the potential benefits of and barriers to BCAs and by drawing lessons from the failures and limited successes to implement these measures, the research will help identify why, despite advice from academics, policy-makers appear reluctant to use BCAs. With that knowledge, it may be possible to inform policy-making efforts worldwide, in collaboration with government officials. Considering that more ambitious policies are urgently needed to address climate change, tools to safeguard the competitiveness of domestic industries are essential. Since BCAs are among the most promising options to address these concerns, there is a need to investigate their viability. Furthermore, given that  8 international climate efforts under the United Nations Framework Convention on Climate Change (UNFCCC) are based on unilateral pledges to reduce emissions with national variations in ambition, BCAs could become increasingly important in the future as a tool to equalize these differences by levelling the playing field between countries. Therefore, to make much-needed progress in implementing effective policies to reduce emissions, it is crucial to bridge the gap between the theory and practice of BCAs. 1.4 Outline of Dissertation The next six chapters of this dissertation proceed as follows. Chapter 2 reviews both the potential benefits of BCAs and potential barriers to adopting and implementing them. It also offers a theoretical discussion of BCAs based on the extant literature. While there are potentially significant benefits from enhancing domestic climate policies with BCAs, the chapter also highlights a number of concerns about these measures. These potential barriers to BCAs form the hypotheses that are tested empirically in the case studies that follow. Chapters 3 to 6 consist of four case studies that explore specific experiences with BCAs. Each chapter explains the relevant policy developments and tests the study’s hypotheses to determine the factors leading to the policy outcomes in these cases. Chapters 3 and 4 relate to BCA development in the EU, while chapters 5 and 6 concern experiences in California. Chapter 3 examines the inclusion of the aviation sector in the EU’s cap-and-trade system. As part of this endeavour, the EU sought to include international flights in this system, which is comparable to a BCA. Although the aviation inclusion was passed into law, international flights were subsequently exempted from the policy. While strong support from policy-makers for the coverage of international flights was able to overcome opposition from EU stakeholders initially, the emergence of vigorous international opposition during the implementation of the policy sparked fears of trade war and retaliation that led to the subsequent exemption of international flights. Key EU stakeholders, notably airline Lufthansa and aircraft manufacturer Airbus, successfully lobbied policy-makers to exempt international flights. Chapter 4 investigates the EU’s experience with BCAs for stationary installations under its cap-and-trade system. Although BCAs for stationary installations have been the subject of  9 recurring, albeit relatively muted, debate throughout the existence of the EU’s cap-and-trade system, no such BCAs have been used in the system. Stakeholders’ predominantly negative attitude towards BCAs and policy-makers’ limited willingness to engage in a discussion on these measures prevented their adoption. Industry stakeholders preferred free allocation of emission allowances as an alternative to BCAs, which offered them significant financial value, and policy-makers enjoyed the political advantages that came with this value. At the same time, the use of free allocation avoided the risk of repercussions for international relations. Chapter 5 analyzes the inclusion of electricity imports in California’s cap-and-trade program. Although imports of electricity have been included from the start of the cap-and-trade program, policy-makers have struggled to prevent market participants from circumventing this form of BCA. While a strong coalition of policy-makers and environmental non-governmental organizations (NGOs) was able to fend off opposition to the BCA initially, political opposition from a group of major utilities, driven by concerns about regulatory ambiguity and the BCA’s effectiveness in achieving emissions reductions, subsequently led policy-makers to weaken the BCA by granting significant exemptions. Chapter 6 studies California’s experience with BCAs for industrial facilities in its cap-and-trade program. Although BCAs for industrial facilities have received some degree of attention in California over the years, the state has not applied any such measures in its cap-and-trade program to date. Overwhelming stakeholder opposition in combination with limited demand for these measures explains this policy outcome. Industry stakeholders preferred free allocation of emission allowances as an alternative to BCAs for industrial facilities, which offered them significant financial value and came with political advantages for policy-makers. The final chapter 7 highlights the case studies’ key findings and compares experiences with BCAs across these cases to generate evidence-based insights about the adoption and implementation of BCAs in practice. The chapter presents the research findings for each hypothesis and offers recommendations for policy-makers. It also addresses the study’s limitations and suggests areas for further research. 10 2 The Promise and Problems of Border Carbon Adjustments 2.1 Introduction Although there are potentially significant benefits from enhancing domestic climate policies with BCAs, there are also a number of concerns about these measures. This chapter reviews both the potential benefits of BCAs and the potential barriers to adopting and implementing them. The potential barriers form the hypotheses that are tested empirically in the case studies that follow in chapters 3 to 6. While this chapter does not aim to provide a normative assessment of the desirability of BCAs, it explores the practical implications that policy-makers might encounter when adopting and implementing BCAs in practice. On the one hand, BCAs offer the promise of economic, environmental, and political benefits. In protecting the competitiveness of domestic industries relative to peers in jurisdictions with more lenient standards, such measures could avoid negative economic consequences, increase environmental benefits by countering carbon leakage, and, in doing so, build greater political support for domestic carbon pricing or regulation. What is more, depending on their design, BCAs may even incentivize other jurisdictions to implement their own climate policies or join international efforts to cut emissions. On the other hand, there may also be questions about the ability of BCAs to comply with WTO law or other legal provisions, practical concerns about the administrative complexity of BCAs and their effectiveness in achieving their potential benefits, fears of repercussions for international relations, preferences among policy-makers and stakeholders for alternative measures, and domestic political opposition to BCAs. The chapter concludes that, based on the extant literature, BCAs may be particularly appealing to policy-makers aiming to furnish their domestic climate policies with a high degree of environmental effectiveness. Where environmental effectiveness objectives are not in the foreground, however, policy-makers may turn to alternative measures that are less controversial and offer other advantages, while avoiding the risks of BCAs. Although the choice to apply BCAs depends on the specific circumstances and constraints that policy-makers face in a particular policy setting, the barriers to BCAs may be difficult to overcome.  11 The remainder of this chapter proceeds as follows. Part 2.2 examines the potential benefits of BCAs, and part 2.3 considers the potential barriers to adopting and implementing them. Based on this extant literature, part 2.4 offers a theoretical discussion of BCAs. Part 2.5 concludes with a summary. 2.2 Potential Benefits of BCAs BCAs may be beneficial from an economic, environmental, and political perspective. The discussion first addresses their potential to safeguard the competitiveness of domestic industries, reducing the loss of jobs, and counter policy-induced carbon leakage (section 2.2.1) as well as demand-driven carbon leakage (section 2.2.2). The discussion then addresses BCAs’ potential to lessen domestic political opposition to climate policies (section 2.2.3) before turning to their potential benefit of incentivizing other jurisdictions to take climate action (section 2.2.4). Before explaining each of these potential benefits in detail, it should be noted that there are two types of carbon leakage, namely policy-induced and demand-driven carbon leakage, each of which can be countered using BCAs.1 Policy-induced carbon leakage refers to the shift of emissions to other jurisdictions with more lenient climate policies in response to domestic climate policies.2 Demand-driven carbon leakage is independent of the cause of the emissions shift, thus includes policy-induced carbon leakage, and comprises the entirety of emissions released abroad to meet consumption in a given jurisdiction.3 Since these two types of leakage differ both in scale and in how they are quantified, they are discussed separately.                                                1 For an overview of these two types of carbon leakage, see Glen P Peters, “Managing Carbon Leakage” (2010) 1:1 Carbon Management 35. 2 Glen P Peters & Edgar G Hertwich, “CO2 Embodied in International Trade with Implications for Global Climate Policy” (2008) 42:5 Environmental Science & Technology 1401 at 1402 [Peters & Hertwich, “CO2 Embodied”]; Peters, supra note 1 at 36. 3 Peters & Hertwich, “CO2 Embodied”, supra note 2; Peters, supra note 1 at 35-36.  12 2.2.1 Safeguarding Competitiveness, Reducing Loss of Jobs, Countering Policy-Induced Carbon Leakage A potential triple benefit may arise from using BCAs in jurisdictions that have implemented domestic climate policies. By levelling the playing field of costs from domestic climate policies, BCAs may safeguard the competitiveness of industries that are subject to these policies. This, in turn, may reduce the loss of jobs from jurisdictions that show leadership in mitigating climate change. In addition to these economic arguments in favour of BCAs, an environmental argument for BCAs can be made as well because they may counter policy-induced carbon leakage. Policy-induced carbon leakage, also known as strong carbon leakage, can occur through two main channels, namely the fossil fuel market channel and the competitiveness channel on non-energy markets.4 Under the fossil fuel market channel, domestic climate policy reduces demand for fossil fuels in the regulating jurisdiction, which may lower international fossil fuel prices and, in turn, increase fossil fuel consumption in jurisdictions without climate policies.5 Under the competitiveness channel, domestic climate policy increases costs for domestic energy-intensive and trade-exposed (EITE) industries, which may incentivize the relocation of industrial production to jurisdictions without climate policies and amplify adverse impacts on production and employment in these industries.6 While the concept of policy-induced carbon leakage is well established, its magnitude and the relative importance of the different leakage channels are less clear.7 Only a few                                                4 Christoph Böhringer, Edward J Balistreri & Thomas F Rutherford, “The Role of Border Carbon Adjustment in Unilateral Climate Policy: Overview of an Energy Modeling Forum Study (EMF 29)” (2012) 34 Energy Economics S97 at S97. 5 Ibid. 6 Ibid. 7 See e.g. Nico Bauer et al, “CO2 Emission Mitigation and Fossil Fuel Markets: Dynamic and International Aspects of Climate Policies” (2015) 90 Technological Forecasting and Social Change 243 at 244; Onno Kuik & Marjan Hofkes, “Border Adjustment for European Emissions Trading: Competitiveness and Carbon Leakage” (2010) 38:4 Energy Policy 1741 at 1742.  13 empirical studies exist that evaluate the actual extent of policy-induced carbon leakage.8 For instance, in an econometric ex-post analysis of the Kyoto Protocol, Aichele and Felbermayr show that countries that have ratified the Kyoto Protocol and committed to emissions reductions under this agreement have reduced their domestic emissions by about 7%, while at the same time increasing the ratio of net carbon imports over domestic emissions by about 14 percentage points.9 Later, these authors showed that Kyoto countries’ exports were reduced by 13-14% due to the Kyoto commitment, with the most profound effects found in energy-intensive industries, which suggests a loss in competitiveness in such sectors.10 In a more recent study, these same authors find that the Kyoto Protocol has led to carbon leakage with an estimated leakage rate of some 40%, which means that emissions in non-Kyoto countries increased by an amount equivalent to 40% of the emissions reduced in Kyoto countries.11 Other studies have focused on the EU Emissions Trading System (ETS). Bolscher et al. find no evidence for policy-induced carbon leakage in the EU ETS between 2005 and 2012.12 However, the authors note that the direct costs from the EU ETS were limited during this time due to an abundance of emission allowances in the system, most of which were allocated free of charge, and the use of international offset credits for compliance.13 Thus, the report cautions that higher carbon prices could lead to policy-induced carbon leakage in the future.14 Similarly, Ellerman, Convery, and Perthuis examined the EU ETS between 2005                                                8 Intergovernmental Panel on Climate Change, Climate Change 2014, Mitigation of Climate Change: Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge, UK: Cambridge University Press, 2014) at 386. 9 Rahel Aichele & Gabriel Felbermayr, “Kyoto and the Carbon Footprint of Nations” (2012) 63:3 Journal of Environmental Economics and Management 336 [Aichele & Felbermayr, “Carbon Footprint of Nations”]. 10 Rahel Aichele & Gabriel Felbermayr, “Estimating the Effects of Kyoto on Bilateral Trade Flows Using Matching Econometrics” (2013) 36:3 The World Economy 303 [Aichele & Felbermayr, “Effects of Kyoto”]. 11 Rahel Aichele & Gabriel Felbermayr, “Kyoto and Carbon Leakage: An Empirical Analysis of the Carbon Content of Bilateral Trade” (2015) 97:1 Review of Economics and Statistics 104 at 114-115. 12 See Hans Bolscher et al, “Carbon Leakage Evidence Project: Factsheets for Selected Sectors” (2013) Ecorys at 11. 13 Ibid. 14 Ibid at 14.  14 and 2007 and also found no statistical evidence for policy-induced carbon leakage.15 Like Bolscher et al., however, the authors note that the EU ETS carbon price was new and volatile during this period and that many installations received allowances free of charge and in excess of their actual emissions.16 Focusing on the cement and iron and steel industries, Chan, Li, and Zhang analyze the EU ETS until 2009 and report that their findings cannot substantiate concerns over policy-induced carbon leakage in these sectors, although the authors also remark that the use of free allocation could partially explain this observation.17 Similarly, Branger, Quirion, and Chevallier were unable to observe carbon leakage in the cement and steel sectors due to the EU ETS until 2012, but they note that these sectors have benefited from generous free allocation of emission allowances.18 The relatively low carbon price levels experienced since 2013 further limit the costs from the EU ETS, thus reducing the likelihood of policy-induced carbon leakage. In sum, it appears difficult to determine the risk of policy-induced carbon leakage in the EU ETS empirically due to the existence of free allocation and the relatively low carbon price in recent years, although the risk could increase with a more stringent policy framework in the future. More common than empirical studies are studies that rely on economic models to simulate the leakage effects of domestic climate policies. The various models used in these studies draw on specific assumptions, including market characteristics and the stringency of climate policies. The indicator typically used to quantify the leakage problem is the rate of leakage, indicated as the fraction of unilateral emissions reductions that are offset by increases in emissions abroad.19                                                15 A Denny Ellerman, Frank J Convery & Christian de Perthuis, Pricing Carbon: The European Union Emissions Trading Scheme (Cambridge: Cambridge University Press, 2010) at 233. 16 Ibid at 233-234. 17 Hei Sing (Ron) Chan, Shanjun Li & Fan Zhang, “Firm Competitiveness and the European Union Emissions Trading Scheme” (2013) 63 Energy Policy 1056 at 1064, 1057. 18 Frédéric Branger, Philippe Quirion & Julien Chevallier, “Carbon Leakage and Competitiveness of Cement and Steel Industries Under the EU ETS: Much Ado About Nothing“ (2013) CIRED, Working Paper 53-2013 at 23. 19 Intergovernmental Panel on Climate Change, supra note 8 at 386.  15 At the high end of the estimates available in the economic modelling literature, Babiker finds that leakage rates for energy-intensive industries may be as high as 130% under certain types of market structures, a finding that would mean climate policies in industrialized countries could in fact lead to an increase in global emissions.20 Other studies, however, estimate leakage rates to be well below 100%. For instance, Arroyo-Currás et al. model the policy-induced carbon leakage rate of pioneering regions that adopt ambitious climate action early on and find it to be limited to 16%.21 Furthermore, Böhringer, Balistreri, and Rutherford compare the results of 12 economic models that simulate the impacts of unilateral carbon pricing in industrialized countries on their EITE industries.22 They find policy-induced carbon leakage rates between 5% and 19%, with a mean average of 12% across all models.23 These models, however, do not account for industrial process emissions,24 which form a substantial share in total emissions of energy-intensive sectors like cement and steel.25 Bednar-Friedl, Schinko, and Steininger find policy-induced carbon leakage rates to be almost one third higher when taking into account industrial process emissions.26 Whereas most studies focus on the competitiveness channel as the main driver of policy-induced carbon leakage, Bauer et al. employ 11 models to simulate the carbon leakage rates with a specific focus on the impacts of domestic climate policies on fossil fuel markets.27 While most of their models estimate leakage rates to range between 4% and 22%, which is largely in line with other research results, one model results in a leakage rate of up to 62% and three models show marginally negative leakage rates of up to around -4%.28 A negative                                                20 Mustafa H Babiker, “Climate Change Policy, Market Structure, and Carbon Leakage” (2005) 65:2 Journal of International Economics 421. 21 Tabaré Arroyo-Currás et al, “Carbon Leakage in a Fragmented Climate Regime: The Dynamic Response of Global Energy Markets” (2015) 90 Technological Forecasting and Social Change 192. 22 Böhringer, Balistreri & Rutherford, supra note 4. 23 Ibid at S100. 24 Ibid at S99, n 1. 25 Birgit Bednar-Friedl, Thomas Schinko & Karl W Steininger, “The Relevance of Process Emissions for Carbon Leakage: A Comparison of Unilateral Climate Policy Options With and Without Border Carbon Adjustment” (2012) 34 Energy Economics S168 at S168. 26 Ibid. 27 Bauer et al, supra note 7. 28 Ibid at 252.  16 leakage rate means that global emissions decrease even below the level of the domestic reductions.29 This can occur where the fossil fuel market channel of carbon leakage leads to a substitution of coal consumption with less carbon-intensive fuels in jurisdictions without climate policy. Specifically, where domestic climate policies reduce gas and oil consumption in acting jurisdictions, this may increase the global supply of these fossil fuels and, in turn, substitute coal consumption in jurisdictions without domestic climate policies, thus reducing emissions even in non-acting jurisdictions.30 The wide range of leakage rates found in the economic modelling literature illustrates that such simulations are predicated on a number of model-specific assumptions.31 In addition, they differ in their focus of different leakage channels. Nevertheless, both empirical and economic modelling studies document the risk of policy-induced carbon leakage involved in enacting unilateral carbon-pricing policies. Against this background, BCAs feature prominently as a solution to the problem of policy-induced carbon leakage in the absence of uniform global carbon pricing.32 As only very few examples of limited BCAs exist,33 empirical studies on the effects of BCAs on leakage rates are not available to date. However, research based on economic models indicates that although BCAs mainly target the competitiveness channel and are considered to have no or insignificant effects on carbon leakage through the fossil fuel market channel,34 they can effectively reduce policy-induced carbon leakage. In their                                                29 See ibid. 30 See ibid at 245, 255. 31 Böhringer, Balistreri & Rutherford, supra note 4 at S100. 32 See e.g. Aichele & Felbermayr, “Carbon Footprint of Nations”, supra note 9 at 351; Aichele & Felbermayr, “Effects of Kyoto”, supra note 10 at 326; Böhringer, Balistreri & Rutherford, supra note 4 at S97; Bednar-Friedl, Schinko & Steininger, supra note 25 at S168. 33 See Joost Pauwelyn, “Carbon Leakage Measures and Border Tax Adjustments under WTO Law” in Geert Van Calster & Denise Prévost, eds, Research Handbook on Environment, Health and the WTO (Cheltenham: Edward Elgar, 2013) 448 at 456, 459-461 [Pauwelyn, “Carbon Leakage Measures”]; Aaron Cosbey et al, “Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature” (2019) 13:1 Review of Environmental Economics and Policy 3 at 4; Michael Mehling et al, “Designing Border Carbon Adjustments for Enhanced Climate Action” (2017) Climate Strategies, Working Paper at 9 [Mehling et al, “Designing BCAs”]. 34 Kuik & Hofkes, supra note 7 at 1747; Böhringer, Balistreri & Rutherford, supra note 4 at S107; see also Cosbey et al, supra note 33 at 5-6.  17 comparison of 12 economic models, Böhringer, Balistreri, and Rutherford find that complementing unilateral carbon pricing in industrialized countries with BCAs for EITE industries reduces the leakage rate on average by one third compared to unilateral carbon pricing in industrialized countries without BCAs.35 Balistreri and Rutherford show that an alternative representation of international trade in their economic model can even yield an estimated reduction of the leakage rate by around half.36 Furthermore, Bednar-Friedl, Schinko, and Steininger find that when taking into account industrial process emissions, BCAs’ effectiveness in reducing policy-induced carbon leakage is doubled.37 Kuik and Hofkes simulate the carbon leakage resulting from the EU’s cap-and-trade system and show that BCAs could reduce the leakage rate by around a quarter, with the steel sector standing to benefit from a particularly strong reduction of up to 94%.38 This more disaggregated analysis shows that the effectiveness of BCAs to counter carbon leakage differs by sector, which the authors attribute to differences in how sectors are affected by different leakage channels.39 This suggests that BCAs may be more effective in some sectors than in others at reducing policy-induced carbon leakage and safeguarding their competitiveness. Finally, it should be noted that none of the studies examining the extent of policy-induced carbon leakage or the effectiveness of BCAs specifically assesses the impact of reduced competitiveness on employment levels. Nevertheless, while concentrating on the impact of unilateral climate policies on leakage rates, several of these studies recognize the general link between a loss of competitiveness and the loss of jobs.40                                                35 Böhringer, Balistreri & Rutherford, supra note 4 at S100. 36 Edward J Balistreri & Thomas F Rutherford, “Subglobal Carbon Policy and the Competitive Selection of Heterogeneous Firms” (2012) 34 Energy Economics S190 at S194. 37 Bednar-Friedl, Schinko & Steininger, supra note 25 at S174. 38 Kuik & Hofkes, supra note 7 at 1746-1747. 39 See ibid. 40 See Böhringer, Balistreri & Rutherford, supra note 4 at S97; Chan, Li & Zhang, supra note 17 at 1057; Arroyo-Currás et al, supra note 21 at 192; also Stéphanie Monjon & Philippe Quirion, “Addressing Leakage in the EU ETS: Border Adjustment or Output-Based Allocation?” (2011) 70:11 Ecological Economics 1957 at 1958.  18 To conclude, although the precise magnitude of policy-induced carbon leakage is unclear, the issue remains of concern and economic modelling shows that BCAs can substantially reduce such leakage, safeguard the competitiveness of industries, and thus reduce the loss of jobs. 2.2.2 Countering Demand-Driven Carbon Leakage In addition to the potential triple benefit set out in the previous section, BCAs may also counter demand-driven carbon leakage. This problem, also known as weak carbon leakage, may be described as the shift of emissions to meet consumption in other jurisdictions as a consequence of actions or policies that are not necessarily related to domestic climate policy.41 Only in recent years has the concept of demand-driven carbon leakage begun to find its way into the mainstream climate literature. For instance, while the issue was not yet considered in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change,42 the body’s Fifth Assessment Report now covers the concept alongside the more traditional concern of policy-induced carbon leakage.43 Compared to policy-induced carbon leakage, demand-driven carbon leakage may in fact be the more serious leakage problem of the two.44 The study of demand-driven carbon leakage is analogous to the comparison of different kinds of emissions inventories, namely territorial and consumption-based emissions inventories.45 On the one hand, traditional territorial emissions inventories account for emissions based on where they are released, disregarding the question of where the so-produced goods and services are finally consumed. This is the accounting approach applied in the context of the United Nations Framework Convention on Climate Change and its                                                41 See Intergovernmental Panel on Climate Change, supra note 8 at 386; Peters, supra note 1 at 35. 42 Ibid at 37. 43 See Intergovernmental Panel on Climate Change, supra note 8 at 385-386. 44 Peters, supra note 1 at 36. 45 Ibid.  19 Kyoto Protocol. Consumption-based emissions inventories, on the other hand, attribute emissions to jurisdictions based on their consumption of goods and services, which includes emissions released abroad to satisfy domestic demand.46 While studies of policy-induced carbon leakage usually draw on static computable general equilibrium models, studies of demand-driven carbon leakage use attribution models.47 By analyzing international trade flows and quantifying the “emissions embodied in trade,” it is possible to determine how much of a jurisdiction’s domestic consumption was supported by emissions released abroad.48 Whereas policy-induced carbon leakage only considers a subset of international trade flows, namely those that are explicitly linked to the implementation of domestic climate policy, demand-driven carbon leakage considers all international trade flows.49 Therefore, demand-driven carbon leakage includes policy-induced carbon leakage. Moreover, demand-driven carbon leakage is independent of the cause of emissions shift.50 In fact, studies of demand-driven carbon leakage give no indication as to the cause of such leakage.51 Davis and Caldeira present a global consumption-based emissions inventory for the year 2004 and report that 23% of global CO2 emissions from fossil fuel combustion in this year were embodied in trade, which means that this was the share of emissions released during the production of goods that were ultimately consumed in a different country.52 At the country-level, they find that, for instance, 19% of the emissions released to support the production of goods consumed in the US occurred outside of this jurisdiction, while 28% of the emissions released in China supported the production of goods consumed outside of China.53                                                46 See e.g. Glen P Peters & Edgar G Hertwich, “Post-Kyoto Greenhouse Gas Inventories: Production Versus Consumption” (2008) 86:1-2 Climatic Change 51. 47 Peters, supra note 1 at 36. 48 Ken Caldeira & Steven J Davis, “Accounting for Carbon Dioxide Emissions: A Matter of Time” (2011) 108:21 Proceedings of the National Academy of Sciences of the United States of America 8533 at 8533. 49 Peters, supra note 1 at 36. 50 Glen P Peters & Edgar G Hertwich, “Trading Kyoto” (2008) 2:4 Nature Reports Climate Change 40 at 41. 51 Intergovernmental Panel on Climate Change, supra note 8 at 386; Peters, supra note 1 at 36. 52 Steven J Davis & Ken Caldeira, “Consumption-Based Accounting of CO2 Emissions” (2010) 107:12 Proceedings of the National Academy of Sciences of the United States of America 5687 at 5688. 53 Caldeira & Davis, supra note 48 at 8533.  20 Expanding this static analysis of a single year, Peters et al. investigate the change in emissions embodied in trade over time.54 They report that under traditional territorial accounting of emissions, developed countries’ emissions have decreased by around 2% between 1990 and 2008, and developing countries’ emissions have increased by around 113% in the same period. Adjusting these figures for emissions embodied in trade shows that developed countries’ consumption emissions have in fact increased by around 7% between 1990 and 2008, while developing countries’ consumption emissions have increased by 100% during this time.55 Therefore, taking into account the emissions embodied in trade “reverses the decreasing trend in emissions in developed countries, turning a 2% decrease into a 7% increase.”56 What is more, the emissions embodied in trade have increased rapidly over time, with an average annual increase of over 4% between 1990 and 2008.57 In cumulative terms, international trade has relocated 16 Gt CO2 from developed to developing countries between 1990 and 2008.58 In fact, the extent of this consumption-based leakage exceeds the emissions reductions under the Kyoto Protocol.59 This suggests that at least some of the emissions that the Kyoto Protocol was intended to reduce have moved abroad rather than been cut.60 When disaggregating these international trade flows at a sectoral level, a growing share of global exported emissions can be attributed to non-energy-intensive manufacturing sectors, such as textiles or electronics.61 For instance, while these sectors accounted for 24% of emissions embodied in trade in 1990, this share rose to 30% in 2008.62 Nevertheless, energy-intensive industries, such as cement, steel, or pulp and paper, remain the single                                                54 Glen P Peters et al, “Growth in Emission Transfers via International Trade from 1990 to 2008” (2011) 108:21 Proceedings of the National Academy of Sciences of the United States of America 8903. 55 Ibid at 8904. 56 Caldeira & Davis, supra note 48 at 8534. 57 Peters et al, supra note 54 at 8904. 58 Ibid. 59 Ibid at 8903. 60 Anna Petherick, “When Carbon Footprints Hop” (2012) 2:7 Nature Climate Change 484 at 484. 61 Peters et al, supra note 54 at 8906. 62 Ibid.  21 largest contributor to demand-driven carbon leakage, accounting for 40% of emissions embodied in trade in 2008.63 To summarize, the problem of consumption-based carbon leakage gives rise to serious concerns about the effectiveness of fragmented climate policies that fail to take into account international trade.64 Due to the rapid growth of emissions embodied in trade, both in the form of products and fossil fuels, existing climate policies risk becoming less effective every year.65 To address this growing problem and account for international trade flows, domestic climate policies could be enhanced with BCAs. As shown in a number of economic modelling studies, BCAs are effective tools to reduce carbon leakage.66 BCAs can extend the coverage, and thus the environmental reach, of climate policies beyond the domestic domain,67 and they can ensure that consumers in developed countries bear the full cost of the goods they consume.68 2.2.3 Lessening Domestic Political Opposition to Climate Policies BCAs could also lessen domestic political opposition,69 thus rendering the adoption of domestic climate policies politically more feasible and enabling deeper emission cuts where such policies exist already. Generally speaking, small groups of stakeholders that face significant costs or benefits are likely to exert more political influence than larger groups facing more diffuse costs or                                                63 Ibid; besides non-energy-intensive manufacturing sectors, the remainder of emissions embodied in trade is attributed to the sectors of mining, transport, services, food, and agriculture. 64 Caldeira & Davis, supra note 48 at 8534; Peters & Hertwich, “CO2 Embodied”, supra note 2 at 1401. 65 Robbie M Andrew, Steven J Davis & Glen P Peters, “Climate Policy and Dependence on Traded Carbon” (2013) 8:3 Environmental Research Letters 1 at 1. 66 See section 2.2.1, above. 67 Andrew, Davis & Peters, supra note 65 at 6; Clayton Munngings et al, “Pricing Carbon Consumption: A Review of an Emerging Trend” (2016) Resources for the Future, Discussion Paper 16-49 at 5-6. 68 Carolyn Fischer, “Trade’s Growing Footprint” (2011) 1:3 Nature Climate Change 146 at 147; Peters & Hertwich, “CO2 Embodied”, supra note 2 at 1406. If BCAs improve a levying-nation’s terms of trade, however, the abatement costs could still be shifted on to the carbon-emitting country; see Christoph Böhringer, Jared C Carbone & Thomas F Rutherford, “The Strategic Value of Carbon Tariffs” (2016) 8:1 American Economic Journal: Economic Policy 28 at 40-41. 69 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 452.  22 benefits.70 Thus, opponents of climate policy can be expected to be more influential, the greater the costs of compliance resulting from that policy.71 Since EITE industries are among those sectors to experience the most profound economic impacts from climate policies,72 they are likely to form the most vehement opposition to such policies. The relative influence of interest groups further depends on their ability to mobilize the electorate at large. Interest groups’ claims to speak for that electorate are likely to have a more profound impact when public opinion aligns with the interests these groups represent. For example, when the salience of environmental issues is relatively low or the salience of economic issues is relatively high, politicians are likely to be receptive to industry representatives claiming to speak on behalf of voters’ interest in jobs and the economy.73 Political institutions may play a role as well in determining how successful political opposition to climate policy can be. Political systems featuring multiple veto points, such as in the US, present more opportunities for opponents to block climate policy, making it easier for the status quo to prevail.74 Therefore, particularly in situations where public opinion is aligned with industry interests and where political institutions exhibit multiple veto points, groups representing EITE industry interests are likely to be influential in opposing domestic climate policies and, ultimately, in shaping relevant policy outcomes. BCAs may lessen such opposition. As shown in a number of economic modelling studies,75 BCAs are effective measures to level the playing field of costs from unilateral climate policies and thus to safeguard the competitiveness of domestic EITE industries.76                                                70 See Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven, CT: Yale University Press, 1982) at 34. 71 Kathryn Harrison & Lisa McIntosh Sundstrom, “Introduction: Global Commons, Domestic Decisions” in Kathryn Harrison & Lisa McIntosh Sundstrom, eds, Global Commons, Domestic Decisions: The Comparative Politics of Climate Change (Cambridge, MA: MIT Press, 2010) 1 at 9. 72 See e.g. Robert N Stavins, “Addressing Climate Change With a Comprehensive US Cap-And-Trade System” (2008) 24:2 Oxford Review of Economic Policy 298 at 313. 73 Harrison & Sundstrom, supra note 71 at 9. 74 Ibid at 4, 17; Kathryn Harrison, “The United States as Outlier: Economic and Institutional Challenges to US Climate Policy” in Kathryn Harrison & Lisa McIntosh Sundstrom, eds, Global Commons, Domestic Decisions: The Comparative Politics of Climate Change (Cambridge, MA: MIT Press, 2010) 67 at 68. 75 See section 2.2.1, above. 76 See e.g. Böhringer, Balistreri & Rutherford, supra note 4 at S102.  23 Specifically, BCAs on imports may protect domestic EITE industries from foreign competition, while BCAs on exports may level the playing field for EITE industries competing on foreign markets. In addition, green businesses, such as renewable energy producers, and emissions-efficient EITE producers may support BCAs on imports as they drive up the costs for less efficient foreign competitors. What is more, BCAs could avoid alternative measures for cost containment that may harm the environmental effectiveness of domestic climate policies, such as exemptions or weakening of mitigation targets, or impair their cost-effectiveness, such as free allocation of emission allowances.77 In sum, BCAs may offer political advantages as they may reduce domestic political opposition to climate policies.78 Due to their ability to level the playing field of costs from unilateral climate policies, BCAs may lead domestic EITE industries to drop their opposition or even lend their explicit support to the introduction of domestic climate policy. Correspondingly, where domestic climate policy has been adopted already, the addition of BCAs may allow policy-makers to tighten their reduction targets, thus enabling deeper emission cuts. As a result, particularly where significant opposition to domestic climate policy from influential industry groups exists, BCAs may help tip the scales towards political support from these stakeholders. 2.2.4 Incentivizing Other Jurisdictions to Take Climate Action Lastly, BCAs could incentivize other jurisdictions to implement their own climate policies or join international efforts to cut emissions.79 Considering the slow progress towards an effective international climate action and the general lack of domestic climate initiatives to make up for the absence of effective multilateral solutions, the potential of BCAs to incentivize other jurisdictions could inspire progress in reducing global emissions.                                                77 See Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 452. 78 Ibid. 79 Ibid; Tracey Epps & Andrew Green, Reconciling Trade and Climate: How the WTO Can Help Address Climate Change (Cheltenham: Edward Elgar, 2010) at 208.  24 The past two decades have revealed a serious deadlock in the effort of securing international climate action that effectively limits the global rise in emissions. Although more and more domestic carbon-pricing initiatives are implemented throughout the world,80 this largely uncoordinated patchwork-type process is progressing at an arguably sluggish pace. In the absence of effective global action, and given the relatively slow uptake of sub-global initiatives, alternative ways to counter the unchecked rise of global emissions are sorely needed. Against this background, BCAs may constitute an alternative to global climate action. By offering to exempt imports from jurisdictions that implement their own climate policies or join international efforts to cut emissions, jurisdictions adopting BCAs can provide incentives for others to take climate action. This way, BCAs can leverage a jurisdiction’s desire to collect revenues domestically that accrue from imposing a carbon price on trade flows rather than letting others capture these rents.81 Similarly, Vogel shows that regulatory competition among trading partners may not necessarily lead to a “race to the bottom,” but can in fact result in a “race to the top” that drives domestic environmental policies upwards in ambition.82 Named after the US state whose automobile emissions standards spurred such an outcome, this “California effect” can occur where affluent jurisdictions with large markets, and thus market power, adopt more stringent environmental policies than their trading partners, forcing producers abroad to adjust their production for continued access to these markets.83 Recognizing this adjustment as a competitive advantage, export-oriented producers may be more likely to support more stringent environmental policies in their own jurisdiction because their exports to greener markets already comply with those more ambitious policies.84 While Vogel observes this effect with product standards, BCAs that extend a domestic carbon price to imported goods                                                80 See World Bank, State and Trends of Carbon Pricing 2018 (Washington, DC: World Bank, 2018). 81 Dieter Helm, Cameron Hepburn & Giovanni Ruta, “Trade, Climate Change, and the Political Game Theory of Border Carbon Adjustments” (2012) 28:2 Oxford Review of Economic Policy 368 at 391. 82 David Vogel, Trading Up: Consumer and Environmental Regulation in a Global Economy (Cambridge, MA: Harvard University Press, 1995) at 6-7. 83 Ibid at 6. 84 Ibid.  25 could similarly help raise the level of ambition of environmental policies in trading partners’ jurisdictions with less stringent policies.85 Atkinson et al. estimate effective tariff rates of BCAs on global trade flows and find, at a carbon price of $50/tCO2, average tariff rates of 10%, 8%, and 12% for goods exported from China, India, and South Africa, respectively.86 This potentially substantial impact on trade flows illustrates the significant leverage that could be exerted using BCAs to incentivize climate action in other jurisdictions. Indeed, using an economic model, Lessmann, Marschinski, and Edenhofer show that there is significant potential to raise participation in international environmental agreements through trade sanctions.87 Further, using a political game theory model, Helm, Hepburn, and Ruta show that there are strong incentives for countries whose exports are subject to BCAs to respond with domestic climate action, either in the form of BCAs on their own exports or even with comprehensive domestic carbon pricing.88 Similarly, Böhringer, Carbone, and Rutherford use an economic model in combination with a policy game to explore the role of BCAs in inducing free-riding countries to take domestic climate action.89 They find that the use of BCAs is credible and could lead major emitters, such as China and Russia, to adopt binding abatement targets in response to BCAs, thus reducing the global welfare cost of reducing global emissions.90 Besides the intention to avoid BCAs imposed by others, there are also more indirect economic effects at play. Jurisdictions subject to BCAs may, for trade reasons, be dependent on the economic performance of those imposing them, and BCAs lessen the economic burden of reducing emissions for those using them.91 Furthermore, when jurisdictions that                                                85 See Kathryn Harrison, “International Carbon Trade and Domestic Climate Politics” (2015) 15:3 Global Environmental Politics 27 at 37. 86 Giles Atkinson et al, “Trade in ‘Virtual Carbon’: Empirical Results and Implications for Policy” (2011) 21:2 Global Environmental Change 563. 87 Kai Lessmann, Robert Marschinski & Ottmar Edenhofer, “The Effects of Tariffs on Coalition Formation in a Dynamic Global Warming Game” (2009) 26:3 Economic Modelling 641. 88 Helm, Hepburn & Ruta, supra note 81 at 388. 89 Böhringer, Carbone & Rutherford, supra note 68. 90 Ibid at 31. 91 Ibid.  26 take domestic climate action in response to BCAs are the source of low-cost abatement opportunities, the global welfare cost of reducing emissions declines, which improves the overall efficiency of the global economy.92 Jurisdictions subject to BCAs can benefit from both of these effects indirectly. As a result, BCAs can increase the pressure for domestic carbon-pricing initiatives to be adopted, without the need for global climate action.93 At the same time, this could eventually lead to more international climate action by helping build a broader coalition of interests that supports such action.94 In this sense, BCAs could in fact be a potential game changer to break the gridlock in the international climate negotiations.95 Alternatively, with more domestic climate action being taken in response, BCAs could substitute or at least complement the global climate negotiations under the auspices of the United Nations.96 To sum up, BCAs could be used as a “stick” to prod other jurisdictions to take climate action by implementing their own climate policies or by joining international efforts to cut emissions. As Helm, Hepburn, and Ruta put it, BCAs “provide a pragmatic way of gradually expanding the ‘coalition of the willing,’ without having to wait for a top-down global treaty.”97 Given the current gridlock in global climate negotiations, BCAs could even be seen as the only way of making substantial progress on mitigating climate change in the near future.98 2.3 Potential Barriers to BCAs Although BCAs offer the promise of economic, environmental, and political benefits, there are also a number of concerns about these measures. This part discusses the potential                                                92 Ibid. 93 Helm, Hepburn & Ruta, supra note 81 at 391. 94 Ibid at 370. 95 Ibid at 382. 96 Ibid. 97 Ibid at 392. 98 Ibid.  27 barriers to adopting and implementing BCAs, which form the hypotheses that are tested empirically in the case studies in chapters 3 to 6. The discussion addresses the ability of BCAs to comply with WTO law or other legal provisions (section 2.3.1), practical concerns about the administrative complexity of BCAs and their effectiveness in achieving their potential benefits (section 2.3.2), fears of repercussions for international relations (section 2.3.3), preferences among policy-makers and stakeholders for alternative measures (section 2.3.4), and domestic political opposition that outweighs political demand for BCAs due to negative economic impacts from these measures or due to industry stakeholders opposing BCAs for strategic reasons (section 2.3.5). 2.3.1 Concerns about WTO Law or Other Legal Limitations One question that arises routinely in the context of BCAs is whether such measures are compliant with the rules of the WTO. The WTO provides a rule-based framework for international trade. Broadly speaking, WTO rules regulate international trade in goods and services, and trade-related aspects of intellectual property rights. Aiming to promote non-discrimination in international trade, WTO law effectively constrains policy-makers in their design of domestic policies that affect international trade. As BCAs regulate international trade flows, they are subject to WTO law.99 For trade in goods, WTO members undertake to abide by the most-favoured-nation and national-treatment principles of the General Agreement on Tariffs and Trade (GATT). The former, enshrined in Article I of the GATT, seeks to prevent discrimination between trading partners, while the purpose of the latter, codified in Article III of the GATT, is to ensure non-discrimination between imported and domestic goods.100 At the same time, WTO law foresees room for deviating from these general principles as long as WTO members comply                                                99 For a comprehensive overview of international trade regulation under the WTO, see e.g. Thomas Cottier & Matthias Oesch, International Trade Regulation: Law and Policy in the WTO, the European Union and Switzerland - Cases, Materials and Comments (London: Cameron May, 2005). 100 See e.g. ibid at 346-347, 382.  28 with the exceptions under Article XX of the GATT. Under this provision, exceptions are possible, for example, for trade measures “necessary to protect human, animal or plant life or health” (paragraph b) or “relating to the conservation of exhaustible natural resources” (paragraph g), provided that they also meet the requirements of the provision’s introductory paragraph, or “chapeau,” which seeks to prevent the abuse or misuse of these exceptions.101 On the one hand, legal scholars hold that the WTO-compliant design of BCAs is possible. Furthermore, even if BCAs were to be found illegal by a WTO panel, the legal consequences are relatively limited. On the other hand, significant legal uncertainties do exist, and the design of WTO-compliant BCAs is not trivial. In addition, although contrary to expert opinion, policy-makers might believe that BCAs would not survive a WTO challenge and be unaware of the relatively limited legal consequences of a WTO violation. Therefore, WTO law may pose a barrier to adopting and implementing BCAs after all. In addition to concerns about WTO law, other legal limitations may exist that could also act as barriers, such as conflicts of BCAs with constitutional law. Although relevant case law is relatively limited, leading WTO law experts indicate that BCAs can be designed to be WTO-compliant. Charnovitz, for instance, points out that, contrary to popular misconception, BCAs are not illegal per se under WTO rules and notes that such measures may be justified under the exceptions of Article XX of the GATT.102 Equally, Low, Marceau, and Reinaud hold that many climate policy measures may lead to prima facie GATT violations but highlight that the WTO provides policy space for such measures through the exceptions of Article XX GATT.103 Indeed, they argue that WTO jurisprudence expanded the scope of Article XX over time precisely to justify public policies that would otherwise be inconsistent with the basic GATT rules.104 Bodansky, Bunnee, and Rajamani also see room for WTO law to accommodate domestic climate policies,                                                101 See e.g. ibid at 428-466. 102 Steve Charnovitz, “The Law of Environmental ‘PPMs’ in the WTO: Debunking the Myth of Illegality” (2002) 27:1 The Yale Journal of International Law 59 at 101, 110. 103 Patrick Low, Gabrielle Marceau & Julia Reinaud, “The Interface between the Trade and Climate Change Regimes: Scoping the Issues” (2012) 46:3 Journal of World Trade 485 at 506, 516. 104 Ibid at 516.  29 particularly under Article XX GATT.105 Also Epps and Green confirm that BCAs may be designed so as to be compatible with WTO rules.106 Pauwelyn asserts that, if necessary, such measures may be justified under the exceptions of Article XX GATT, but goes further by arguing that such measures can pass WTO muster even without recourse to this provision as long as they are designed carefully.107 What is more, even if BCAs were to be found illegal by a WTO panel, the only remedy necessary would be to change the domestic legislation, since no damages are due for past harm.108 From a legal point of view, therefore, BCAs could be included in domestic climate policies and, in case they are found inconsistent, the WTO member having imposed the BCA would essentially get a second chance to amend the measure and render it WTO-compliant.109 In other words, even if a trade measure is not WTO-compliant initially, it can be amended so as to bring it in line with WTO rules. In fact, this was the case in the famous shrimp-turtle dispute. In this case, a trade measure taken by the US that was initially found to violate Article XX, was subsequently revised by the US, and then confirmed to be in compliance with Article XX.110 Where non-compliance persists, the WTO may authorize trade sanctions for enforcement.111 However, in practice, a WTO member in violation can “decide to maintain its legislation and instead pay trade compensation or accept similar trade restrictions imposed by other, complaining WTO members.”112 Even if significant countermeasures were imposed                                                105 Daniel Bodansky, Jutta Brunnée & Lavanya Rajamani, International Climate Change Law (Oxford: Oxford University Press, 2017) at 340-341. 106 Epps & Green, supra note 79 at 122. 107 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 505-506. 108 Ibid at 455-456. 109 Ibid at 456. 110 See United States – Import Prohibition of Certain Shrimp and Shrimp Products (1998), WTO Doc WT/DS58/AB/R (Appellate Body Report) [Shrimp-Turtle AB Report]; United States – Import Prohibition of Certain Shrimp and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia (2001), WTO Doc WT/DS58/AB/RW (Appellate Body Report). 111 Michael Trebilcock, Understanding Trade Law (Cheltenham: Edward Elgar, 2011) at 28. 112 Joost Pauwelyn, “Testimony Before the Subcommittee on Trade of the House Committee on Ways and Means” (24 March 2009), online: United States House Committee on Ways and Means <http://waysandmeans.house.gov/> at 17 [Pauwelyn, “Testimony”]; also Joel P Trachtman, “WTO Law   30 by others, a WTO member in violation might choose to endure the sanctions where upholding the BCA is particularly politically salient.113 For instance, in the long-standing hormone-treated beef dispute, the EU was found to be in violation of WTO rules,114 but instead of withdrawing its trade measure, the EU first decided to suffer retaliatory trade restrictions by the US for years and later offered the US more market access in another trading area, which ended the dispute.115 Similarly, in a dispute concerning online gambling services in Antigua and Barbuda, the US was found to be in violation of WTO rules,116 but although the WTO subsequently authorized Antigua and Barbuda to retaliate, the US has maintained its legislation.117 Arguably, WTO members with smaller economies may be less likely to maintain their non-compliant legislation vis-à-vis large trading partners. Nevertheless, particularly for WTO members with large economies, even a repeated finding that a WTO member is in violation is no guarantee for a trade measure to be repealed. Indeed, “the WTO does not have the power to force its members to effectively change their legislation.”118 Furthermore, irrespective of the legal merits of a WTO challenge, the parties involved in a potential dispute may have political reasons not to challenge a BCA at the WTO in the first place.119 Depending on the specific interests at stake in a particular case, a risk assessment                                                                                                                                                  Constraints on Border Tax Adjustment and Tax Credit Mechanisms to Reduce the Competitive Effects of Carbon Taxes” (2016) Resources for the Future, Discussion Paper 16-03 at 1-2. 113 Epps & Green, supra note 79 at 166; also Fouré, Jean, Houssein Guimbard & Stéphanie Monjon, “Border Carbon Adjustment in Europe and Trade Retaliation: What Would Be the Cost for European Union?” (2013) CEPII, Working Paper 2013-34, who show that countries using BCAs might prefer to suffer WTO-sanctioned penalties over rescinding their BCAs because the penalties would likely be relatively small; Trachtman, supra note 112 at 42, who calls such a strategy “civil disobedience” or “efficient breach.” 114 See European Communities – Measures Concerning Meat and Meat Products (Hormones) (1998), WTO Doc WT/DS26/AB/R, WT/DS48/AB/R (Appellate Body Report). 115 Pauwelyn, “Testimony”, supra note 112 at 17-18; World Trade Organization, Dispute DS26, online: WTO <https://www.wto.org/> (retrieved 16 March 2015). 116 See United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (2005), WTO Doc WT/DS285/AB/R (Appellate Body Report). 117 See Pauwelyn, “Testimony”, supra note 112 at 18; World Trade Organization, Dispute DS285, online: WTO <https://www.wto.org/> (retrieved 16 March 2015). 118 Pauwelyn, “Testimony”, supra note 112 at 18. 119 See e.g. Thomas Cottier et al, “Differential Taxation of Electricity: Assessing the Compatibility with WTO Law, EU Law and the Swiss-EEC Free Trade Agreement” (2014) World Trade Institute, Universität Bern at 78; Thomas Cottier et al, “CO2 Levies and Tariffs on Imported Electricity: Assessing the Compatibility of Options   31 may reveal political impediments that could deter a WTO member from launching a challenge. Thus, any decision to challenge a BCA at the WTO is likely to be taken not only from a legal and economic perspective, but also from a political point of view. To recap, BCAs can be designed to be WTO-compliant and the legal consequences of a WTO violation are relatively limited, since no damages are due for past harm and because a WTO member in violation could in practice maintain its BCA. In addition, a political risk assessment might deter a WTO member from challenging a BCA in the first place. Despite these assurances, and as acknowledged by legal scholars, significant legal uncertainties do exist regarding the compliance of BCAs with WTO rules.120 This stems from the fact that the current WTO rules have not been developed with climate change and domestic climate policies in mind.121 Furthermore, relevant case law is limited and concerns only certain legal questions while leaving open others. This, as Low, Marceau, and Reinaud put it, “sometimes leads to legal awkwardness.”122 To take one example, the GATT’s Working Party report on border tax adjustments made it clear that border adjustment is only allowed for indirect taxes, i.e. when levied on products, and not producers.123 Direct taxes, such as payroll taxes, taxes on income, or taxes on profit, which are imposed on producers, are not eligible for border adjustment. The distinction between direct and indirect taxes was originally based on economic theory and, although the economic basis for this distinction has since been called into question, it remains legally relevant.124 The question of whether a price on emissions released during the production of a                                                                                                                                                  with WTO Law, EU Law and the Free Trade Agreement Switzerland–EEC” (2014) World Trade Institute, Universität Bern at 74-75. 120 Epps & Green, supra note 79 at 139; Charles E McLure, “The GATT-Legality of Border Adjustments for Carbon Taxes and the Cost of Emissions Permits: A Riddle, Wrapped in a Mystery, Inside an Enigma” (2011) 11:4 Florida Tax Review 221 at 291 [McLure, “GATT-Legality”]; Daniel Bodansky & Jessica C Lawrence, “Trade and Environment” in Daniel Bethlehem et al, eds, The Oxford Handbook of International Trade Law (Oxford: Oxford University Press, 2009) 506 at 537. 121 Low, Marceau & Reinaud, supra note 103 at 487; McLure, “GATT-Legality”, supra note 120 at 236. 122 Low, Marceau & Reinaud, supra note 103 at 487. 123 General Agreement on Tariffs and Trade, Report by the Working Party on Border Tax Adjustments (1970), GATT Doc L/3464, BISD 18S/97. 124 It was initially thought that only indirect taxes, but not direct taxes, would generally be passed on to consumers, which has become recognized as inaccurate; see Patricia Birnie, Alan Boyle & Catherine Redgwell,   32 good qualifies as an indirect tax and is thus eligible for border adjustment is debated in the literature. Low, Marceau, and Reinaud hold that most emission charges fall on producers and are thus direct taxes that cannot be adjusted at the border.125 Pauwelyn, however, considers such measures to be taxes “applied at least indirectly” to products.126 Another example of legal awkwardness as a result of WTO rules having been developed prior to climate policy can be found in the issue of “process and production methods” (PPMs). Two different PPMs may be distinguished, namely physically incorporated PPMs, also known as product-related PPMs, and physically unincorporated PPMs, also known as non-product-related PPMs.127 The first class concerns goods where the PPM leaves a physical trace in the final product, for instance products containing asbestos, whereas the second class concerns products where the PPM does not leave any physical trace in the final product, such as goods manufactured using an emissions-intensive production method. While border adjustment is generally allowed for indirect taxes on inputs that are physically incorporated in the final product, the WTO-legality of taxes on products that are physically identical although produced with different emissions-intensities is less clear.128 From the perspective of WTO law, the distinction between different kinds of PPMs appears sensible because this regime aims to prevent unfair practices such as hidden subsidies on exports and it is difficult to verify the amount of a certain input during the production where the input is not physically incorporated in the final product.129 From the perspective of climate policy, however, this distinction appears problematic given that the effectiveness of climate policies is contingent on the very differentiation between goods produced with different emissions-intensities.                                                                                                                                                  “International Trade and Environmental Protection” in International Law and the Environment, 3rd ed (Oxford: Oxford University Press, 2009) 753 at 789-799; Matthew Genasci, “Border Tax Adjustments and Emissions Trading: The Implications of International Trade Law for Policy Design” (2008) 2:1 Carbon & Climate Law Review 33 at 35. 125 Low, Marceau & Reinaud, supra note 103 at 499. 126 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 480. 127 Low, Marceau & Reinaud, supra note 103 at 495. 128 See e.g. Epps & Green, supra note 79 at 76; Genasci, supra note 124 at 35; Low, Marceau & Reinaud, supra note 103 at 495; McLure, “GATT-Legality”, supra note 120 at 256. 129 Genasci, supra note 124 at 35.  33 In addition to legal uncertainties, designing WTO-compliant BCAs arguably cannot be accomplished without great difficulty. On the one hand, legal scholarship notes that BCAs may be construed to be compliant with WTO law in theory. On the other hand, although the literature offers no measure of the level of effort required, it illustrates the difficulty of designing WTO-compliant BCAs. For instance, the WTO and United Nations Environment Programme’s report on trade and climate change highlights that the relevance of WTO rules to domestic climate policies very much depends on the design of those policies and how they are implemented in practice.130 Trebilcock notes that the numerous complex legal issues involved are, in part, a function of the particular design features of BCAs.131 Moore specifically cautions governments to take great care in designing BCAs,132 and McLure emphasizes that such measures must be designed carefully and administered fairly if they are to be compliant with WTO rules.133 Most succinctly, Pauwelyn concludes that, although BCAs can be consistent with WTO rules, “[t]he devil [is] in the details.”134 Thus, because the specific design of a BCA is crucial for its ability to pass under WTO rules, such measures must be designed very carefully. The challenge of designing WTO-compliant BCAs is further complicated by the fact that the legal literature does not offer clear guidance on whether it is easier to satisfy the basic GATT rules or the exceptions under Article XX GATT. Pauwelyn points out that the discrimination to be avoided under the chapeau of Article XX GATT is different from that under the basic GATT rules: under the latter, “products” are the subject of the discrimination to be avoided, while it is “countries where the same conditions prevail” under the former.135 This differentiation between different kinds of discrimination makes sense because                                                130 World Trade Organization & United Nations Environment Programme, Trade and Climate Change (Geneva: WTO & UNEP, 2009) at 142. 131 Trebilcock, supra note 111 at 168. 132 Michael O Moore, “Implementing Carbon Tariffs: A Fool’s Errand?” (2011) 34:10 The World Economy 1679 at 1688. 133 McLure, “GATT-Legality”, supra note 120 at 293. 134 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 506. 135 Ibid at 501.  34 otherwise, if these two kinds of discrimination were the same, justification under Article XX GATT would not be possible by definition as soon as discrimination was found under the basic GATT rules.136 As a consequence, the more BCAs differentiate between jurisdictions, the more likely they would violate the most-favoured-nation principle of Article I GATT, but the more likely they would be compliant with the chapeau of Article XX GATT. Not differentiating between jurisdictions would appear to be important for the purpose of satisfying the requirements under the chapeau of Article XX GATT. However, discrimination under WTO law may not only arise if jurisdictions in matching situations are treated differently, but also if jurisdictions in different situations are treated identically.137 As a result, in order to avoid discrimination, policy-makers face the difficulty of having to gauge whether differential treatment between particular jurisdictions is required, permitted, or prohibited under the chapeau of Article XX GATT. What is more, the basis for making this determination is unclear, for example whether jurisdictions may be assessed based on the stringency of their domestic climate policies, their level of development, historical contribution to climate change, or a combination of these factors.138 Therefore, the differentiation between different forms of discrimination creates a dilemma for policy-makers designing BCAs because they need to consciously choose a strategy of designing BCAs that either avoid the violation of the basic GATT rules or satisfy the requirements of Article XX GATT.139 McLure agrees, noting that policy-makers must choose their strategy carefully because “one approach may doom the other.”140 In addition to legal uncertainties and the difficulty of designing WTO-compliant BCAs, although contrary to expert opinion, policy-makers might believe that BCAs would not survive a WTO challenge and be unaware of the relatively limited legal consequences of a                                                136 Ibid. 137 See Shrimp-Turtle AB Report, supra note 110 at para 165. 138 See e.g. Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 502-504. 139 Harro van Asselt, Thomas Brewer & Michael Mehling, “Addressing Leakage and Competitiveness in US Climate Policy: Issues Concerning Border Adjustment Measures” (2009) Climate Strategies, Working Paper at 55, n 213; see also Susanne Droege et al, “The Trade System and Climate Action: Ways Forward Under the Paris Agreement” (2017) 13:2 South Carolina Journal of International Law & Business 195 at 241. 140 McLure, “GATT-Legality”, supra note 120 at 293.  35 WTO violation. Such a belief could exist due to the nature of the advice that policy-makers receive from their legal counsellors. Finally, apart from concerns about WTO law, other legal limitations may exist that could act as barriers to adopting and implementing BCAs. Such limitations could stem from potential conflicts of BCAs with domestic constitutional law. For instance, the Dormant Commerce Clause (DCC) of the US constitution prohibits discrimination in inter-state commerce, which could constrain state-level climate policies.141 Indeed, the extent to which California may regulate emissions that occur outside of its borders, in particular through the inclusion of electricity imports in California’s cap-and-trade system,142 and the legality of such a BCA under the DCC have been the subject of academic debate.143 To conclude, despite advice from legal scholars that the WTO-compliant design of BCAs is possible and the relatively limited legal consequences even if they are ruled invalid by the WTO, significant legal uncertainties do exist. Indeed, “an impressive number of questions remain unresolved about how far environmental regulation can go in restricting trade, and how far the trade regime can go in restricting environmental measures.”144 In addition, although the level of effort required is unclear, designing WTO-compliant BCAs may pose a challenge for policy-makers. They might also believe that BCAs would not survive a WTO challenge and be unaware of the relatively limited legal consequences of a WTO violation. Moreover, other legal limitations, such as conflicting constitutional law, may                                                141 See e.g. William Funk, “Constitutional Implications of Regional CO2 Cap-and-Trade Programs: The Northeast Regional Greenhouse Gas Initiative as a Case in Point” (2009) 27:2 UCLA Journal of Environmental Law and Policy 353 at 366; Joseph Allan MacDougald, “Why Climate Law Must Be Federal: The Clash Between Commerce Clause Jurisprudence and State Greenhouse Gas Trading Systems” (2008) 40:5 Connecticut Law Review 1431. 142 For a detailed study of this case, see chapter 5. 143 See e.g. Jim Rossi & Andrew JD Smith, “Electric Power Resource ‘Shuffling’ and Subnational Carbon Regulation: Looking Upstream for a Solution” (2014) 5 San Diego Journal of Climate & Energy Law 43 at 45; Thomas Alcorn, “The Constitutionality of California’s Cap-and-Trade Program and Recommendations for Design of Future State Programs” (2013) 3:1 Michigan Journal of Environmental & Administrative Law 87; Patricia Weisselberg, “Shaping the Energy Future in the American West: Can California Curb Greenhouse Gas Emissions from Out-of-State, Coal-Fired Power Plants Without Violating the Dormant Commerce Clause?” (2007) 42:1 University of San Francisco Law Review 185. 144 Bodansky & Lawrence, supra note 120 at 537.  36 present further obstacles. As a result, WTO law and other legal constraints could act as barriers to adopting and implementing BCAs. 2.3.2 Practical Concerns Another barrier to BCAs could be found in practical concerns. Specifically, governments could be worried about the administrative complexity of implementing and administering BCAs (section 2.3.2.1) or about the effectiveness of BCAs in achieving their potential benefits (section 2.3.2.2). 2.3.2.1 Administrative Complexity There could be concerns about the administrative complexity for governments to implement and administer BCAs. Assessing the emissions released during the production of an imported good can be a challenging task. These emissions may vary greatly depending on the specific production process used when manufacturing the product, and they cannot be determined based on the physical characteristics of the product.145 Specifically, the emissions intensity depends on the fuels used in the production process, the energy efficiency of the production process, the emissions from processes other than the combustion of fuels, called process emissions, and any indirect emissions from the use of electricity, which requires information on the emissions intensity of the electricity generation process.146 Therefore, the emissions intensity of a product varies not only by jurisdiction but also by individual installation.147                                                145 See Moore, supra note 132 at 1691; Peter Holmes, Tom Reilly & Jim Rollo, “Border Carbon Adjustments and the Potential for Protectionism” (2011) 11:2 Climate Policy 883 at 890. 146 See World Trade Organization & United Nations Environment Programme, supra note 130 at 101; Moore, supra note 132 at 1688; Trevor Houser et al, Leveling the Carbon Playing Field: International Competition and US Climate Policy Design (Washington, DC: Peterson Institute for International Economics, World Resources Institute, 2008) at 75-76; Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 455. 147 Houser et al, supra note 146 at 76; Gary Clyde Hufbauer, Steve Charnovitz & Jisun Kim, Global Warming and the World Trading System (Washington, DC: Peterson Institute for International Economics, 2009) at 68.  37 The complexity involved in assessing the emissions-intensity is especially daunting where BCAs would be imposed not only on intermediate products, such as steel, but also on final products, such as automobiles.148 The administrative complexity increases further where BCAs are based on the actual emissions intensity of an imported good rather than on average values by jurisdiction or product.149 Although the approximation of data may be possible, precise figures are difficult to obtain even in jurisdictions with excellent data.150 Fortunately, the application of BCAs can be based on average values and be restricted to a limited number of emissions-intensive intermediate products, such as cement, steel, aluminum, and chemicals.151 Existing research offers pragmatic and creative solutions to address administrative complexity concerns.152 Furthermore, in the EU, the European Commission has benchmarked the emissions intensity of 52 intermediate products across the entire union for the purpose of free allocation in its cap-and-trade system.153 Such benchmarks could also be used for the purpose of BCAs,154 although they would have to be based on the emissions intensity of the worst polluters in order to provide incentives for foreign producers to reduce their emissions.155 BCAs for such products would be administratively feasible also because “imports would come from a limited number of companies.”156                                                148 Houser et al, supra note 146 at 76; see also Christopher L Weber & Glen P Peters, “Climate Change Policy and International Trade: Policy Considerations in the US” (2009) 37:2 Energy Policy 432 at 438; Holmes, Reilly & Rollo, supra note 145 at 890-891. 149 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 455. 150 Weber & Peters, supra note 148 at 438. 151 Moore, supra note 132 at 1689; Carbon Trust, “Tackling Carbon Leakage: Sector-Specific Solutions for a World of Unequal Carbon Prices“ (2010) at 10-11; Susanne Dröge, “Tackling Leakage in a World of Unequal Carbon Prices” (2009) Climate Strategies at 42, 81. 152 See e.g. Mehling et al, “Designing BCAs”, supra note 33; see also Michael Mehling et al, “How to Design Border Carbon Adjustments that Work for the Climate” (2017) Climate Strategies, Brief. 153 See Stefan Pauer, “Development and Application of Greenhouse Gas Performance Benchmarks in the European Union Emissions Trading Scheme” (2012) 1:3 Economics of Energy & Environmental Policy 105. 154 See Stéphanie Monjon & Philippe Quirion, “How to Design a Border Adjustment for the European Union Emissions Trading System?” (2010) 38:9 Energy Policy 5199 at 5204. 155 See Moore, supra note 132 at 1697-1698. 156 Mikael Skou Andersen, “Border Adjustment With Taxes or Allowances to Level the Price of Carbon” in Mona Hymel et al, eds, Innovation Addressing Climate Change Challenges: Market-Based Perspectives (Cheltenham: Edward Elgar, 2018) 20 at 25.  38 At the same time, in jurisdictions where a large share of embodied emissions is found in imports of final products, BCAs applied to a limited number of intermediate products can capture only a relatively small share of emissions embodied in imports.157 In the US, for instance, the share of emissions embodied in imports attributable to intermediate products is estimated at 26% in 2004.158 Arguably, this is still a sizeable share,159 and applying limited BCAs may be better than “allow[ing] the perfect to be the enemy of the good.”160 Nevertheless, the informational burden for developing even such limited BCAs remains challenging.161 2.3.2.2 Effectiveness of BCAs in Achieving Their Potential Benefits In addition to concerns about the administrative complexity of BCAs, there could also be doubts with respect to BCAs’ effectiveness in achieving their potential benefits. Specifically, there may be risks of avoidance through fraud and circumvention. Arbitrageurs would have incentives to purchase products manufactured in an emissions-intensive production process and falsely label them as low-carbon products to avoid an otherwise higher charge upon import.162 Although the problem of fraudulent labelling could possibly be addressed by attempting to identify the true source of an imported product through bureaucratic means, this could be a laborious activity, particularly where the origin of a product cannot be determined based on physical characteristics alone.163 A more serious problem could occur where other jurisdictions redirect their trade flows by exporting low-carbon products to jurisdictions imposing BCAs while retaining physically identical but carbon-intensive products for the domestic market or exporting them to                                                157 Weber & Peters, supra note 148 at 438. 158 Christopher L Weber & H Scott Matthews, “Embodied Environmental Emissions in U.S. International Trade, 1997−2004” (2007) 41:14 Environmental Science & Technology 4875. 159 Weber & Peters, supra note 148 at 438. 160 Helm, Hepburn & Ruta, supra note 81 at 391. 161 Moore, supra note 132 at 1689. 162 Ibid at 1699. 163 Ibid.  39 jurisdictions not applying BCAs.164 Evidently, circumventing BCAs by shuffling production around in this way would undercut the whole point of the exercise,165 potentially offsetting all of the benefits of BCAs. However, because this risk is not quantified in the literature, the likelihood of it to materialize remains unclear. In addition, although BCAs could be used to incentivize other jurisdictions to take climate action, their effectiveness in doing so appears uncertain. Past experience with economic sanctions to coerce other jurisdictions to change policy has a mixed track record.166 Empirical research on the effectiveness of economic sanctions suggests a success rate of around one third in influencing another jurisdiction’s behaviour in the desired direction, with cases less successful where jurisdictions sought more than only a modest policy change.167 Furthermore, on the one hand, it may be argued that BCAs are likely to offer limited leverage to induce climate action in other jurisdictions where imports are responsible for only little of global demand of goods in a particular sector.168 For instance, although demand in industrialized countries for aluminum, pulp and paper, and basic chemicals has grown between 1991 and 2005, demand for these products from emerging economies has far outpaced the former. In the case of iron and steel and cement, demand in industrialized countries has even declined in that period, while demand in the developing world has tripled.169 Indeed, the developing world, particularly China, is expected to account for most of the growth in demand for goods in all of the aforementioned sectors.170 Moreover, less than 3% of aluminum produced in China was exported to the US in 2005. For pulp and                                                164 Ibid; Michael Jakob & Robert Marschinski, “Interpreting Trade-Related CO2 Emission Transfers” (2013) 3:1 Nature Climate Change 19 at 22; see also Houser et al, supra note 146 at 56; Tancrède Voituriez & Xin Wang, “Getting the Carbon Price Right Through Climate Border Measures: A Chinese Perspective” (2011) 11:5 Climate Policy 1257 at 1258; Cosbey et al, supra note 33 at 18. 165 Moore, supra note 132 at 1699. 166 Houser et al, supra note 146 at 57. 167 Gary Clyde Hufbauer et al, Economic Sanctions Reconsidered, 3rd ed (Washington, DC: Peterson Institute for International Economics, 2007) at 158. 168 Houser et al, supra note 146 at 76-77; also Cosbey et al, supra note 33 at 11. 169 Houser et al, supra note 146 at 53. 170 Ibid.  40 paper, this share drops to 2% and is at less than 1% each for iron and steel, basic chemicals, and cement.171 On the other hand, however, Böhringer, Carbone, and Rutherford point out that jurisdictions targeted by BCAs may be dependent on the economic performance of those imposing them.172 Given that BCAs lessen the economic burden of reducing emissions for those jurisdictions applying them, BCAs might be successful in inducing climate action in other jurisdictions after all.173 At the same time, these authors’ policy game simulates only two major emitters to adopt binding abatement targets in response to BCAs.174 Overall, therefore, it appears difficult to predict the effectiveness of BCAs to incentivize other jurisdictions to take climate action. In conclusion, it may be challenging in practice to develop and administer BCAs and to prevent them from being circumvented by other jurisdictions. In addition, the effectiveness of BCAs in incentivizing other jurisdictions to take climate action appears uncertain. As a result, practical concerns could pose a barrier to adopting and implementing BCAs. 2.3.3 Concerns about Repercussions for International Relations Besides WTO-related questions, concerns about other repercussions for international relations could also hinder the adoption and implementation of BCAs. Specifically, policy-makers could face fears of trade war and retaliation (section 2.3.3.1) or that BCAs could hamper international climate efforts by reducing jurisdictions’ willingness to cooperate (section 2.3.3.2).                                                171 Ibid at 76. 172 Böhringer, Carbone & Rutherford, supra note 68 at 31. 173 Ibid. 174 Ibid.  41 2.3.3.1 Fear of Trade War and Retaliation Policy-makers may be concerned that BCAs could lead to “retaliatory tit-for-tat trade wars.”175 The tangible risk of retaliation was illustrated in 2012 when China put on hold orders worth billions of dollars from European aircraft manufacturer Airbus in response to the EU’s extension of its cap-and-trade system to international flights, which is comparable to a BCA and prompted Airbus to oppose the extension.176 Moreover, BCAs for climate purposes could set a precedent for using such measures to compensate for other competitive disadvantages, such as minimum wage or health care regulations.177 Thus, BCAs could lead to trade measures spiralling out of control. Whereas a lively academic debate on BCAs has emerged in recent years, the history of global trade policy in fact shows a strong trend in the opposite direction. Superseding the protectionist policies that helped make World War II nearly inevitable,178 a track record of progressive trade liberalization began at the end of this war.179 Furthermore, the notion that the reduction of trade barriers promotes peace and stability has been recognized among policy-makers as early as 1944 when a high-ranking official in the US Department of State put it into words so eloquently: “Trade conflict breeds noncooperation, suspicion, bitterness.                                                175 Jason E Bordoff, “International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns” in Lael Brainard & Isaac Sorkin, eds, Climate Change, Trade, and Competitiveness: Is a Collision Inevitable? (Washington, DC: Brookings Institution Press, 2009) 35 at 41; also Charles E McLure, “Border Adjustments for Carbon Taxes and the Cost of Emissions Permits” in Gilbert E Metcalf, ed, US Energy Tax Policy (Cambridge: Cambridge University Press, 2010) 193 at 199; Jagdish Bhagwati & Petros C Mavroidis, “Is Action Against US Exports for Failure to Sign Kyoto Protocol WTO-Legal?” (2007) 6:2 World Trade Review 299 at 309-310; Weber & Peters, supra note 148 at 438; Scott Barrett, “Climate Treaties and the Imperative of Enforcement” (2008) 24:2 Oxford Review of Economic Policy 239 at 245. 176 See Peter Marsh, Joshua Chaffin & Simon Rabinovitch, “Delay EU Carbon Levy, Says Air Industry”, Financial Times (11 March 2012), online: Financial Times <http://www.ft.com/>; for a detailed study of this case, see chapter 3. 177 Bordoff, supra note 175 at 41. 178 Gilbert R Winham, “The Evolution of the World Trading System – The Economic and Policy Context” in Daniel Bethlehem et al, eds, The Oxford Handbook of International Trade Law (Oxford: Oxford University Press, 2009) 5 at 13. 179 See ibid at 16-21; Silvia Nenci, “Tariff Liberalisation and the Growth of World Trade: A Comparative Historical Analysis of the Multilateral Trading System” (2011) 34:10 World Economy 1809 at 1813-1816, who shows declining trends for tariff barriers since the end of World War II.  42 Nations which are economic enemies are not likely to remain political friends for long.”180 Further, Nordhaus notes that “[t]he current free and open trading system is the result of hard-fought efforts to combat protectionism” and advises that BCAs “must be used with great caution.”181 Considering the world’s historical track record of reducing trade barriers under the GATT 1947 and, subsequently, the WTO, policy-makers could indeed be reluctant to jeopardize these hard-earned achievements. Böhringer, Carbone, and Rutherford’s policy game, which simulates other countries’ responses to BCAs, evidences the risk of trade war and retaliation. Although they find that two major emitters would respond by adopting binding abatement targets, they also find that all other countries retaliate when exposed to BCAs.182 Furthermore, illustrative of the potential for retaliatory action, a number of studies examine the economic impact BCAs have on other jurisdictions. These studies show that, although BCAs can protect the competitiveness of domestic industries, they lead to severe welfare and competitiveness losses for jurisdictions exposed to them. For instance, Böhringer, Balistreri, and Rutherford show that BCAs have drastic re-distributive impacts and impose a substantial burden on non-abating countries.183 They find that, where unilateral carbon pricing in industrialized countries is not coupled with BCAs, the percentage loss of GDP in abating countries is three times higher than in non-abating countries. When adding BCAs, however, the percentage loss of GDP is shared equally between abating and non-abating countries.184 Similarly, Winchester, Paltsev, and Reilly show that, compared to a scenario of unilateral climate policies without BCAs, these measures improve the welfare of                                                180 Quoted in John H Jackson, The World Trading System: Law and Policy of International Economic Relations, 2nd ed (Cambridge, MA: MIT Press, 1997) at 13. 181 William D Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World (New Haven, CT: Yale University Press, 2013) at 257. 182 Böhringer, Carbone & Rutherford, supra note 68 at 31. 183 Böhringer, Balistreri & Rutherford, supra note 4 at S102. 184 Ibid.  43 those countries adopting them from -0.75% to -0.53% of GDP but lead to a deterioration of welfare from -0.23% to -1.41% of GDP in countries targeted by these measures.185 Lanzi, Chateau, and Dellink arrive at similar results and conclude that BCAs are effective for countries taking climate action but cause severe welfare and competitiveness losses for non-acting countries.186 Therefore, BCAs shift part of the burden of emissions reductions to non-acting countries.187 In addition, as BCAs limit market access for developing countries, they weaken the potential of trade to support development and reduce poverty, which appears problematic from a development perspective.188 As a result, the protection of competitiveness and welfare in countries adopting BCAs comes at the expense of the competitiveness and welfare in countries that are at the receiving end of these measures.189 Unsurprisingly, therefore, China has rejected BCAs “[u]sing the threat of a trade war.”190 2.3.3.2 Fear of Hampering International Climate Efforts Given their potentially severe economic impacts, BCAs may not only harm trade relations but also international efforts to address climate change. Political and economic tensions between the world’s major powers make collective progress on climate mitigation                                                185 Niven Winchester, Sergey Paltsev & John M Reilly, “Will Border Carbon Adjustments Work?” (2011) 11:1 The BE Journal of Economic Analysis & Policy 1 at 20. 186 Elisa Lanzi, Jean Chateau & Rob Dellink, “Alternative Approaches for Levelling Carbon Prices in a World With Fragmented Carbon Markets” (2012) 34 Energy Economics S240 at S249. 187 Ibid. 188 Clara Brandi, “Trade and Climate Change: Environmental, Economic and Ethical Perspectives on Border Carbon Adjustments” (2013) 16:1 Ethics, Policy & Environment 79 at 85; also Julia O’Brien, “The Equity of Levelling the Playing Field in the Climate Change Context” (2009) 43:5 Journal of World Trade 1093 at 1096. 189 Madanmohan Ghosh et al, “Border Tax Adjustments in the Climate Policy Context: CO2 Versus Broad-Based GHG Emission Targeting” (2012) 34 Energy Economics S154 at S163. 190 Voituriez & Wang, supra note 164 at 1258.  44 and adaptation more difficult,191 and BCAs could increase animosity and reduce the goodwill between jurisdictions and their willingness to find cooperative solutions to climate change.192 BCAs may risk worsening poisonous conditions of mistrust and fuel the existing non-cooperative behaviour displayed in the international climate negotiations over the past few decades.193 As BCAs may undermine the trust necessary for future cooperation, they could render the attainment of effective global action even more difficult than it is already.194 In particular, if BCAs were to target large developing countries, such as China or India, this could bear a considerable risk with respect to the achievement of multilateral climate action because, ultimately, climate change is unlikely to be addressed effectively without these countries’ involvement.195 Ironically, therefore, BCAs might in fact turn out to be counterproductive for effective action on climate change.196 Indeed, the risk that BCAs could negatively impact the future cooperation between jurisdictions is the potential flip side of the hoped for benefit of providing incentives for others to take climate action.197 To summarize, BCAs could cause friction between jurisdictions that could escalate and lead to trade war and retaliation. Perhaps even worse, BCAs could harm cooperative efforts to the extent that effective multilateral action on climate change is precluded.                                                191 See e.g. World Economic Forum, “The Global Risks Report 2019, 14th Edition” (2019) at 6; see also Larry Elliott, “Global Tensions Holding Back Climate Change Fight, Says WEF”, The Guardian (16 January 2019), online: The Guardian <http://www.theguardian.com/>. 192 Epps & Green, supra note 79 at 218-219. 193 See J Timmons Roberts & Bradley C Parks, A Climate of Injustice: Global Inequality, North-South Politics, and Climate Policy (Cambridge, MA: MIT Press, 2007) at 8; see also Susanne Droege, “Using Border Measures to Address Carbon Flows” (2011) 11:5 Climate Policy 1191 at 1197. 194 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 454-455; Brandi, supra note 188 at 89. 195 Houser et al, supra note 146 at 56; also O’Brien, supra note 188 at 1096; Weber & Peters, supra note 148 at 438. 196 O’Brien, supra note 188 at 1103. 197 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 454.  45 2.3.4 Alternative Measures While governments may implement alternative measures as a consequence of a failure to adopt BCAs, alternative measures could also be the very cause for this failure. In other words, policy-makers and stakeholders could prefer alternative measures to pursue the potential benefits of BCAs. Because alternative measures may be less controversial and may offer other advantages, their availability could act as a barrier to the adoption and implementation of BCAs. Several alternatives to BCAs exist that may contain costs from climate policies by other means and may be less controversial than BCAs. The availability of these mechanisms is dependent on the type of carbon-pricing instrument applied, in particular whether carbon is priced through a carbon tax or a cap-and-trade system.198 Alternative measures to contain costs include free allocation of emission allowances, credits based on a compliance entity’s output, state aid and tax relief (with or without the recycling of revenue from carbon-pricing instruments), flexibility mechanisms (carbon offsets, banking and borrowing), price ceilings, reductions in the scope of emissions for which a compliance entity is assessed a carbon price, weakening of mitigation targets, and exemptions from carbon pricing.199 These alternatives, however, may not be able to realize all of the potential benefits of BCAs. In particular, while these alternative measures should be able to safeguard the competitiveness of industries, counter policy-induced carbon leakage, and lessen domestic political opposition – albeit to different degrees – they are unable to extend the coverage of domestic climate policies beyond that jurisdiction.200 In addition, they could harm the environmental effectiveness or cost-effectiveness of domestic climate policies.201 Measures to contain costs that undermine environmental targets include exemptions, weakening of mitigation targets, and price ceilings, while cost containment measures that reduce the cost-effectiveness of climate policies include free allocation and state aid.                                                198 Houser et al, supra note 146 at 15. 199 See also Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 461-462; Houser et al, supra note 146 at 16. 200 See Pauwelyn, “Testimony”, supra note 112 at 15-16. 201 See Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 452.  46 Despite the potential drawbacks of alternative cost containment measures as compared to BCAs, policy-makers may, depending on their specific needs and preferences, view alternative measures as being sufficient or perhaps even more suitable for their purposes. Free allocation of emission allowances, in particular, may offer policy-makers important political advantages. Free allocation allows regulated industries to enjoy economic rents and enables policy-makers to control the distributional impacts under a cap-and-trade system.202 Indeed, while the choice between auctioning and free allocation does not change the price impacts for consumers due to the opportunity cost associated with free allowances, freely allocated allowances do not need to be purchased and thus amount to a lump sum transfer from governments to regulated industries.203 Seeking to secure these rents, domestic industry stakeholders may prefer to support the use of free allocation, although the literature appears to be sparse on the factors that underlie stakeholder preferences with regards to free allocation versus BCAs. Particularly stakeholders that would experience negative economic impacts from BCAs, such as importers of emissions-intensive intermediate products, may prefer free allocation.204 The economic rents from free allocation constitute foregone government revenue from auctioning; put differently, they are granted at the expense of the general taxpaying public.205 Conversely, when using BCAs, as long as any rebates on exports do not exceed the proceeds from BCAs on imports, governments would be able to raise revenue. Despite, or perhaps due to, this difference between BCAs and free allocation in raising and foregoing revenue, respectively, the latter may enjoy considerable political appeal among policy-makers. Further, although free allocation and BCAs are not mutually exclusive in principle, it may be difficult in practice for stakeholders to make a case vis-à-vis policy-makers for using both of                                                202 Lawrence H Goulder & Ian W H Parry, “Instrument Choice in Environmental Policy” (2008) 2:2 Review of Environmental Economics and Policy 152 at 164; Nathaniel O Keohane, “Cap and Trade, Rehabilitated: Using Tradable Permits to Control U.S. Greenhouse Gases” (2009) 3:1 Review of Environmental Economics and Policy 42 at 45. 203 Steven Sorrell & Jos Sijm, “Carbon Trading in the Policy Mix” (2003) 19:3 Oxford Review of Economic Policy 420 at 422-423. 204 For details on opposition from importers of emissions-intensive intermediate products, see section 2.3.5, below. 205 Goulder & Parry, supra note 202 at 164.  47 these cost containment measures. In order to avoid overcompensating the regulated industries, policy-makers would face the difficult task of having to calibrate the levels of free allocation and a BCA.206 While the aforementioned alternative measures cannot incentivize other jurisdictions to implement their own climate policies or join international efforts to cut emissions, other alternatives exist that could provide such incentives in a positive rather than negative way as with BCAs. For instance, domestic emissions reduction targets can be made conditional upon climate action taken by other jurisdictions. As part of its climate targets for 2020, the EU has promised additional emissions reductions in case an international agreement is concluded to cut emissions.207 Similarly, the EU agreed a minimum emissions reduction target for 2030 that was reviewed after the 2015 climate summit in Paris.208 Furthermore, the conclusion of trade agreements could be made conditional upon domestic climate action.209 Other examples of positive inducements include technical assistance, capacity building, technology transfers, increased investment, foreign aid, and debt forgiveness.210 Thus, conditional emissions reduction targets and other inducements could be used as “carrots” that may provide positive incentives without the need for negative “stick”-type measures to prod other jurisdictions to take climate action.211 In summary, policy-makers and stakeholders could prefer alternative measures to pursue the potential benefits of BCAs that are less controversial and offer other advantages. Indeed, less controversial measures exist to contain costs and incentivize other jurisdictions to take                                                206 Harro van Asselt & Thomas Brewer, “Addressing Competitiveness and Leakage Concerns in Climate Policy: An Analysis of Border Adjustment Measures in the US and the EU” (2010) 38:1 Energy Policy 42 at 47. 207 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 462. 208 “EU Leaders Set 2030 Climate, Energy Targets”, ENDS Europe (24 October 2014), online: ENDS Europe <http://www.endseurope.com/>. 209 See EU, European Commission, “Feedback and Way Forward on Improving the Implementation and Enforcement of Trade and Sustainable Development Chapters in EU Free Trade Agreements” (26 February 2018), Non-Paper at 10; see also Karl Mathiesen, “EU Says No New Trade Deals With Countries Not In Paris Agreement”, Climate Home News (2 February 2018), online: Climate Home News <https://www.climatechangenews.com/>. 210 Epps & Green, supra note 79 at 177. 211 Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 462.  48 climate action. Therefore, policy-makers could use these alternatives in lieu of BCAs. As a result, the availability of alternative measures could present a barrier to adopting and implementing BCAs. 2.3.5 Domestic Political Opposition Another barrier to BCAs could be found in domestic political opposition that is significant enough to prevent such measures from being adopted or implemented. Opposition could come from organized stakeholder groups, such as various industry associations and NGOs. While EITE industries, on aggregate, are expected to support BCAs due to these measures’ ability to afford protection against foreign competition,212 there could in fact be losers who experience negative economic impacts from BCAs and thus oppose such measures. In addition, where BCAs are proposed as part of an initial introduction of domestic climate policy, industry stakeholders could form opposition for strategic reasons. Moreover, green businesses, emissions-efficient EITE producers, and NGOs could oppose BCAs on exports. As a result, political opposition could outweigh political demand for BCAs. Böhringer, Müller, and Schneider show that, under certain conditions, BCAs can lead to significant economic disadvantages for some industries.213 These authors combine multi-region input-output analysis and economic modelling to examine the impact on domestic EITE industries of complementing unilateral carbon pricing in industrialized countries with BCAs on imports only.214 They find that BCAs may not necessarily be beneficial for all domestic EITE industries.215 EITE industries whose emissions-intensity stems from a high share of emissions-intensive imports could suffer from BCAs due to the increased costs for these imports.216 For instance, the carbon content of the chemical products and non-ferrous metals sectors in                                                212 See sections 2.2.1 and 2.2.3, above. 213 Christoph Böhringer, André Müller & Jan Schneider, “Carbon Tariffs Revisited“ (2014) University of Oldenburg, Discussion Paper V-364-14. 214 See ibid at 2-3. 215 Ibid at 19. 216 Ibid at 2.  49 Switzerland stems to around 65% and 90% from imported emissions, respectively.217 In addition to this input-related factor, unless they are subject to rebates upon export,218 export-oriented companies or sectors could face a further cost-disadvantage on foreign markets because of BCAs.219 This is because BCAs on imports level the playing field on the domestic market, but they lead to a cost-disadvantage for industries competing in markets abroad.220 For example, supplying on aggregate around 75% of output to foreign markets, Switzerland’s EITE industries are particularly export-oriented, with the largest two sectors of chemical products and non-ferrous metals standing out with around 90% of each sector’s output destined for markets abroad.221 As a result of these two driving factors, Böhringer, Müller, and Schneider find that EITE industries in Switzerland shrink, on average, by more than 15 percentage points when supporting domestic carbon pricing with a BCA on imports only, with the country’s non-ferrous metals sector experiencing a dramatic output loss of more than 40 percentage points.222 The authors find similar results for the non-ferrous metals sectors in Norway and Canada, which would face output losses of almost 50 and 10 percentage points, respectively.223 While Böhringer, Müller, and Schneider focus on EITE industries, their findings also apply to non-EITE industries that import emissions-intensive intermediate products. For example, sectors specializing in the assembly of emissions-intensive intermediate products, such as the manufacture of electronics, automobiles, or other machinery, could experience a “knock-on effect” from BCAs on imports due to the increased costs for imported intermediate products.224                                                217 Ibid at 8. 218 See ibid at 18. 219 Ibid at 2. 220 Ibid. 221 Ibid at 8-9. 222 Ibid at 14. 223 Ibid at 18. 224 Andersen, supra note 156 at 28.  50 Therefore, BCAs’ ability to protect the competitiveness of domestic industries is contingent on an industry’s reliance on imports of emissions-intensive inputs, its share of domestic output that is supplied to the export market, and the specific design of a BCA. In the worst case, BCAs on imports only “can drastically acerbate adverse production impacts of unilateral emission pricing for those EITE industries that have a strong export market orientation and import a large share of embodied carbon.”225 Thus, certain companies or sectors may oppose BCAs. In addition, where BCAs are proposed as part of an initial introduction of domestic climate policy, industry stakeholders could form opposition even if they were to benefit from BCAs compared to a policy design without such protection. Industry stakeholders might pursue this strategy in an effort to block or weaken looming climate policy. Only once this effort is exhausted, their focus may shift towards securing beneficial cost containment measures as a second line of defence. Put differently, where domestic climate policy is introduced for the first time, outright support of BCAs would amount to an implicit acceptance of the looming climate policy. Moreover, some domestic stakeholders could oppose export rebates. Green businesses, such as renewable energy producers, and emissions-efficient EITE producers may seek to prevent less efficient domestic producers from obtaining a competitive advantage on foreign markets. Further political opposition to BCAs on exports may come from NGOs. Since rebating exports effectively exempts goods produced for export from domestic climate policy, BCAs on exports undermine the environmental effectiveness of such policies.226 In other words, because exporting a good does not undo the environmental impact created during its production, BCAs on exports can be considered environmentally perverse.227 Although rebating exports may be used to avoid double carbon pricing vis-à-vis jurisdictions                                                225 Böhringer, Müller & Schneider, supra note 213 at 19. 226 See Epps & Green, supra note 79 at 131. 227 Hufbauer, Charnovitz & Kim, supra note 147 at 69; also Sofia Persson, “Practical Aspects of Border Carbon Adjustment Measures: Using a Trade Facilitation Perspective to Assess Trade Costs” (2010) International Centre for Trade and Sustainable Development, Issue Paper 13 at 5.  51 applying their own BCAs on imports,228 this rationale is currently not applicable given the absence of BCAs in practice.229 Therefore, NGOs are unlikely to support BCAs on exports, unless they are necessary to overcome opposition to an initial introduction of domestic climate policy. Stakeholders representing companies or sectors that would lose out under BCAs or oppose them for strategic reasons can be expected to be the more influential the more severe the adverse economic impacts.230 Further, the ability of both industry and environmental interest groups to influence policy-makers is aided where public opinion aligns with their interests and where the institutional environment offers multiple veto points to block policy proposals. Policy-makers may have several reasons for seeking to avoid political opposition. In particular, they may follow their self-interest in retaining their positions in government,231 or they may seek to avoid antagonizing influential stakeholders whose support they might need in the context of other policy initiatives. In sum, although BCAs may be able to protect some domestic EITE industries, not all domestic companies or sectors are expected to benefit in the same way, or at all, from BCAs. In fact, some domestic industries could suffer significantly from BCAs. In addition, industry stakeholders could form opposition for strategic reasons where BCAs are proposed as part of an initial introduction of domestic climate policy. Furthermore, green businesses, emissions-efficient EITE producers, and NGOs could oppose BCAs that include export rebates. As a result, political opposition to BCAs could, on balance, be greater than political demand for these measures. 2.4 Discussion Having set out both the potential benefits of BCAs and the potential barriers to adopting and implementing them, this part discusses these measures from a theoretical perspective.                                                228 Hufbauer, Charnovitz & Kim, supra note 147 at 69. 229 See Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 456, 459-461. 230 See section 2.2.3, above. 231 Harrison & Sundstrom, supra note 71 at 8.  52 Table 1 offers an overview of the potential benefits and barriers of BCAs reviewed above. When assessing the literature, it appears that no obvious answer can be given in favour of or against these measures. Indeed, the anticipated costs and risks of BCAs need to be carefully weighed against their expected benefits.232 Table 1: Potential benefits of and barriers to BCAs Potential benefits of BCAs Safeguarding competitiveness Reducing loss of jobs Countering carbon leakage (policy-induced, and demand-driven) Lessening domestic political opposition Incentivizing others to take climate action Potential barriers to BCAs Legal concerns (WTO, and others) Practical concerns (administrative complexity, and effectiveness) Repercussions for international relations (trade war and retaliation, and hampering international climate efforts) Alternative measures Domestic political opposition  Arguably, the most significant benefit of BCAs could stem from their ability to counter carbon leakage. This concerns both policy-induced carbon leakage, although its actual extent is somewhat uncertain, and especially demand-driven carbon leakage, which growing evidence shows may in fact be the more serious leakage problem of the two. The extension of domestic climate policies beyond the domestic domain, in particular, is a benefit that alternative measures cannot replicate.                                                232 See Pauwelyn, “Carbon Leakage Measures”, supra note 33 at 455.  53 While BCAs could reduce domestic opposition to climate policies, so can other cost containment measures, such as free allocation or output-based tax credits. Nevertheless, BCAs may be a valuable cost containment measure where alternatives would compromise the environmental effectiveness of a climate policy, for example in the case of exemptions or weakening of mitigation targets. Although it might be possible to incentivize other jurisdictions to take climate action by using BCAs as a “stick,” success is not at all certain and, also here, less controversial alternatives exist, namely conditional mitigation targets and other “carrots,” even if their effectiveness may be equally uncertain. Further, the potential backlash from BCAs could be severe, specifically when leading to trade war and retaliation and the destruction of valuable goodwill between jurisdictions, which could preclude multilateral solutions to climate change altogether. Designing WTO-compliant BCAs does not appear to be a trivial exercise, but doing so may be important to policy-makers if they seek to avoid repercussions for international relations, despite the fact that the legal consequences of a WTO violation are relatively limited. Although implementing and administering BCAs may be challenging, many of the practical difficulties raised could be overcome. In addition, alternative measures may pose similar challenges depending on their specific desig