What Is a Carbon Border Adjustment?

A carbon border adjustment, also called a CBAM or border carbon tax, charges imported goods in proportion to their embedded carbon. It is intended to limit carbon leakage (the relocation of emissions-intensive production to countries without carbon pricing) and to put domestic and foreign producers on a comparable cost basis.

The logic and its limits

The textbook argument begins with a simple cost difference. Suppose country A charges $50 per ton of carbon while country B has no carbon price. Steel producers in A then face a cost that their competitors in B avoid. An equivalent charge on B's steel at A's border removes that difference, reducing the incentive to move emissions-intensive production abroad.

That argument starts from an undistorted border, whereas actual tariff schedules are neither zero nor designed to correct carbon externalities. Farrokhi and Lashkaripour (2025) study this second-best setting in a calibrated model with 64 countries, 40 sectors, and full input-output linkages. Carbon border taxes added to existing tariffs deliver only 3.4 percent of the globally optimal carbon reduction. The preexisting tariffs already distort relative prices, so the carbon charge does not reproduce the globally optimal pattern of incentives.

Why border charges achieve little

Three forces account for the result. First, existing tariffs distort trade before the carbon adjustment is applied. Second, a tax on final goods can miss carbon embodied in intermediate inputs that cross borders several times. Third, a border charge changes export prices without requiring exporters to adopt carbon pricing. The participation problem remains.

What works better

Farrokhi and Lashkaripour also consider climate clubs, which condition full market access on adoption of a common carbon price. These clubs achieve 33 to 68 percent of the optimal reduction. A border adjustment changes import prices; a climate club changes a government's incentive to adopt carbon pricing.

Farrokhi, Lashkaripour, and Taheri (2025) study a related arrangement in which trade agreements combine carbon-pricing commitments with revenue redistribution through a Global Climate Fund. Their mechanism can sustain a carbon price near $119 per ton and cut global emissions by half. Border adjustments can support such an agreement, but they do not replace its participation and redistribution provisions.