This article is part of a Synergies series on Next generation trade arrangements for environment and sustainable development. Any views and opinions expressed are those of the author(s).

-----

Carbon border adjustment proposals have surged globally over the past few years. The European Union launched the transitional phase of its carbon border adjustment mechanism (CBAM) in 2023, and started the operational phase in 2026. Similarly, US lawmakers have proposed several bills to tax imports based on their carbon emissions. Other countries, such as the United Kingdom, Canada, and Australia, are also considering similar border levies.

These proposals have different goals, such as protecting domestic industries’ competitiveness, achieving emission reduction goals, and encouraging trading partners to adopt equivalent domestic climate policies. 

Regardless of the specific goals of a policy, a common objective of all the proposals is to address the emissions associated with goods crossing borders. This is due to the variation in the types and stringency of the climate regulations across jurisdictions. While climate change is a global problem, climate policy is enacted nationally, regionally, or locally. Factors including economic development, political support, culture, and access to energy resources determine governments’ choices of whether to enact climate law, and what form the law takes.

The disparate climate policies across jurisdictions inevitably create different regulatory requirements for businesses in international trade. For example, some governments may have incentives to enact less stringent climate laws to lure business investment away from another jurisdiction that has tougher emissions regulations. This is typically referred to as carbon leakage—it occurs when businesses relocate production to jurisdictions with weaker environmental standards. Since greenhouse gas emissions have a global impact no matter where they are emitted, carbon leakage undermines the efficacy of domestic climate policies.

A border-adjusted carbon tax is the most economically efficient way to incentivize emissions reduction while addressing carbon leakage. It works by implementing import taxes and export rebates with a domestic carbon tax. There are many choices in designing carbon border adjustments, such as types of covered goods and emissions, and the treatment of exported goods. 

Border adjustments are widely used in tax policy design, such as value-added taxes (VAT) or excise taxes. A border adjustment ensures that consumers of goods and services pay the same tax, regardless of where they are imported or produced domestically. Imported goods are for domestic consumption, so they are taxed. Exported goods are for foreign consumption, so they are exempted from the tax (receiving export rebates).

While there is a broad consensus on the import taxes component of carbon border adjustments, some critics argue that export rebates would allow or even encourage exporters to generate emissions, which undermines the policy’s environmental goals. They oppose providing rebates to exporters due to environmental protection and climate mitigation considerations. 

Well-designed carbon border adjustments should include export rebates. Legally, World Trade Organization law allows members to border-adjust a domestic indirect tax on products. Since a domestic carbon tax is considered an indirect tax on goods, trade and climate experts have proposed legal and feasible border-adjusted carbon taxes that include import taxes and export rebates. Economically, export rebates reduce the incentives for businesses to relocate their production overseas, which helps protect domestic industry’s competitiveness in the global market. Environmentally, if more countries enact border-adjusted carbon taxes, all domestic consumption within those jurisdictions would be subject to carbon prices. This framework mirrors the global VAT system, where domestic consumption, including imported goods, is taxed while exports are exempt. 

In reality, the specific policy design of carbon border adjustments varies due to political and implementation constraints. These proposals either complement a domestic carbon price as seen in the EU CBAM and the US Clean Competition Act introduced by Senator Sheldon Whitehouse, or function as stand-alone carbon tariffs, such as the 2025 Foreign Pollution Fee Act (FPFA) introduced by US Senator Bill Cassidy. 

Specifically, the FPFA does not include any domestic component of carbon price for US producers and would only enact tariffs on imported goods based on their emissions. Opponents of the proposal argue that this is de facto a protectionist policy that violates international trade law and would make little progress in domestic emissions reduction. 

As businesses navigate a growing patchwork of climate regulations around the world, carbon accounting has emerged as an increasingly important auditing practice.

Regardless of the policy design, implementing carbon border adjustments requires measurement, reporting, and verification (MRV) of product-level greenhouse gas (GHG) emissions. Unlike corporate financial accounting, in which corporate revenues and costs are relatively easy to measure, it is much more challenging to track the total GHG emissions associated with producing goods throughout the supply chain. 

Take automotive manufacturing as an example. If a US factory imports steel from Canada, engines from Germany, tires from China, and electronic systems from Japan, tallying the total carbon footprint of a single vehicle becomes a massive logistical challenge. The US automaker has to obtain emissions data from global suppliers that may lack the capability to track such data. In practice, a typical car contains at least 30,000 parts sourced from a complex global supply chain, covering raw material extraction, car parts manufacturing, and final assembly. Tracing all the parts’ emissions is undoubtedly a daunting task. 

Notably, given the significant complexity of measuring product-level emissions for a finished consumer good, existing carbon border adjustment proposals cover several carbon-intensive industries such as steel, cement, and fertilizer. However, the EU has released proposals to expand the scope of CBAM to cover more downstream goods. 

Carbon accounting at the product-level is difficult because unlike the common specifications of a product, such as market price or shipping weight, GHG emissions are invisible and cannot be easily measured. A variety of factors, such as combusted fossil fuels, industrial processes that generate emissions, technologies used, and emissions from electricity generation, would affect the total amount of emissions associated with manufacturing a product.

As emissions data has been historically available at the facility or industry level, substantial efforts are required to convert them into product-level data. As a result, the policy design choices of carbon border adjustments must balance trade-offs between simplicity (ease of administration and compliance) and accuracy (measuring the actual emissions for as many products as possible). Some exporters will find it easier to use industry-average emissions benchmarks than tracking actual product-level emissions, but this risks over- or underestimating actual carbon footprints.

Currently, product-level carbon accounting methodologies are fragmented. While voluntary frameworks such as the Greenhouse Gas Protocol and the International Organization for Standardization’s ISO 14067 offer guidelines for measuring product life-cycle emissions, no single international standard is universally accepted for measuring and verifying emissions at the individual product level.

In fact, the EU took more than two years to release the product-level carbon intensity estimates (emissions generated from each unit of output) for CBAM’s covered products across 119 jurisdictions. These estimates are intended to be used as punitive default values if an importer cannot determine the actual emissions of an imported good. American Action Forum’s research finds that the published default values have several problems, including methodological complexity and a substantial data gap with more than 60 percent of the country-product specific data missing. Moreover, the default values do not provide any product-level emissions data for EU products, as they are not subject to the CBAM import levy. 

Across the Atlantic, in January 2026, the US Congress directed the Department of Energy (DOE) to conduct a one-year study of product-level carbon intensity on the EU CBAM covered goods for the United States and other major economies. There is tremendous interest in the study results from stakeholders in the US climate and trade policy space.

It remains unclear how the DOE’s carbon intensity methodology will compare to the EU CBAM’s default value framework, though disparities between the two studies' results are highly likely. This underscores the importance of multilateral collaboration in product-level carbon accounting. 

Multilateral collaboration helps standardize global carbon accounting methodologies, which would reduce the compliance burden for businesses, especially multinational corporations and companies in developing countries. This is because large corporations typically have a presence in many countries, which makes compliance with different climate regulations’ carbon accounting requirements prohibitively costly. Businesses in developing nations typically lack the capabilities and resources for robust carbon accounting compared to their peers in advanced economies.

Additionally, as discussed above, carbon accounting at the product level is incredibly challenging. Multilateral collaboration would allow public and private stakeholders around the world to leverage their expertise to contribute to the complex tasks.

There are at least two important questions to consider in multilateral collaboration. First, which components of carbon accounting should be internationally standardized? The most pressing area may be developing industry-specific standards on MRV of product-level carbon emissions. Consumption of fossil fuels and industrial processes vary significantly across industries. It requires multi-disciplinary expertise and knowledge (e.g. chemistry, energy, technology, or electricity) to fully understand the amount of emissions generated from each step of the manufacturing processes. One helpful approach may be a “decision tree” framework for products in specific industries (such as steel or cement), which would provide guidance on how emissions should be measured and calculated if certain technologies, materials, or industrial processes are used. 

Second, what international entities would be suited to facilitate such collaboration? In view of the most pressing area for collaboration, multi-issue international organizations that allow both climate and non-climate experts to work together are ideal. Besides experts that specialize in energy, climate, and environmental topics, the collaboration must involve input from professionals with tax, finance, business, science, supply chain, and specific industry expertise. The Organisation for Economic Co-operation and Development or international trade associations may be appropriate in taking on such an initiative. 

Without multilateral collaboration in carbon accounting, the rise of carbon border adjustments risks creating a patchwork of regulations that overburden businesses and complicates global trade. For climate policies to succeed, carbon accounting should not remain siloed within national borders. Multilateral cooperation is more of a practical necessity than a symbolic diplomatic ideal to ensure that the global transition to a low-carbon economy is both manageable and economically viable.

----------

Shuting Pomerleau is Director of Energy and Environmental Policy at the American Action Forum.

-----

Synergies is an online platform featuring expert commentary and opinions curated by TESS. We foster dialogue and incubate ideas on how to shape a global trading system that effectively addresses global environmental crises and advances sustainable development. Synergies draws on perspectives from leading experts and practitioners across policy communities from around the world. We cultivate solutions-oriented policy analysis for a sustainable future.

The Executive Editor is Fabrice Lehmann.

Disclaimer

Any views and opinions expressed in Synergies are those of the author(s) and do not necessarily reflect those of TESS or any of its partner organizations or funders.

License

All of the content on Synergies is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International (CC BY-NC-SA 4.0) license. This means you are welcome to adapt, copy, and share it on your platforms with attribution to the source and author(s), but not for commercial purposes. You must also share it under the same CC BY-NC-SA 4.0 license.

If you would like to reuse any material published here or if you have any other question related to Synergies, send an email to Fabrice Lehmann.