What Is a Carbon Border Adjustment?

A carbon border adjustment, sometimes called a CBAM or border carbon tax, imposes a charge on imported goods proportional to their embedded carbon content. The policy has two stated aims: prevent carbon leakage (the relocation of emissions-intensive production to jurisdictions without carbon pricing) and level the competitive playing field for domestic firms that face a carbon price.

The logic and its limits

The textbook case for border carbon adjustments is straightforward. If country A prices carbon domestically at $50 per ton, its steel producers face higher costs than competitors in country B, which has no carbon price. A border adjustment charges B's steel an equivalent levy at A's border, eliminating the cost asymmetry. Leakage falls, and A's carbon price can bite without destroying its trade-exposed industries.

The difficulty is that real-world tariffs are not zero, and they are not set to correct externalities. Farrokhi and Lashkaripour (2025) quantify the gap between the textbook and reality. In their calibrated model with 64 countries, 40 sectors, and full input-output linkages, carbon border taxes layered onto existing tariff structures deliver 3.4 percent of the globally optimal carbon reduction. The number is not a rounding error in the model; it reflects the structural problem of adding a second-best correction on top of a first-best-incompatible base.

Why the number is so low

Three forces drive the result. First, existing tariffs already distort trade patterns, so the carbon adjustment does not operate on a clean margin. Second, input-output linkages mean that a border tax on final goods misses the carbon embedded in intermediate inputs, which often cross borders multiple times. Third, without a participation constraint, countries that do not impose carbon pricing face no penalty beyond the border charge itself, which is a price adjustment, not an enforcement mechanism.

What works better

The same paper shows that climate clubs, coalitions that condition full market access on adoption of a common carbon price, achieve 33 to 68 percent of the optimal reduction. The difference is categorical: the club solves the participation problem that border adjustments leave untouched. Separately, Farrokhi, Lashkaripour, and Taheri (2025) demonstrate that embedding carbon-pricing commitments in trade agreements, paired with revenue redistribution through a Global Climate Fund, can sustain a carbon price near $119 per ton and halve global emissions. Border adjustments may be part of that architecture, but they cannot substitute for it.