Environmental Ambition and Economic Protectionism: Why the Design of Border Carbon Adjustments Matters

Border carbon adjustments (BCAs) are becoming a central instrument in climate-trade policy to limit carbon leakage while protecting domestic industry. Their effectiveness, however, depends fundamentally on how they are designed. In this ZEW policy brief, mass-based BCAs (e.g. the Carbon Border Adjustment Mechanism (CBAM) in the EU), which price total embodied emissions, are compared with rate-based proposals, which price only emissions above an intensity benchmark. Drawing on new research on the global steel industry, we show that a rate- or benchmark-based BCA combines an emissions charge with an implicit output subsidy. That weakens the carbon-price signal, encourages exporters to reshuffle cleaner output towards regulated markets, and can induce vertical leakage through underpriced intermediates such as pig iron. In an EU-style setting with domestic carbon pricing, the rate-based design transmits only 36% of the mass-based border price needed to achieve the same global emissions reduction. In a US-style setting without a domestic price anchor, it functions less as a climate instrument and more as an industry tariff that shifts scarcity rents toward domestic downstream users.

, and (2026), Environmental Ambition and Economic Protectionism: Why the Design of Border Carbon Adjustments Matters, ZEW policy brief No. 26-10, Mannheim