1.3 Environmental and economic impacts of BCAs A BCA distinguishes itself from traditional carbon pricing, which directly increases the cost of emitting and reduces emissions, by extending domestic pricing to trade instead of establishing a new carbon price through taxes or cap-and-trade. The primary environmental rationale for BCAs is the mitigation of emissions leakage. Evidence from an Organisation for Economic Co- operation and Development (OECD) study28 suggests that for cement and steel plants across 140 countries, a $1 per tonne of carbon dioxide equivalent (tCO2e) increase in carbon prices reduces emissions by 1.3%, but carbon leakage through international trade offsets about 13% of this domestic reduction, illustrating how carbon pricing and trade dynamics interact to influence net emissions outcomes. While carbon taxes and ETS deliver greater direct emissions cuts overall, BCAs reinforce those reductions at the border. For example, an $88/ tonne CO2 price in the EU was projected to reduce emissions by 21%. Economically, BCAs can improve the efficiency of emissions reduction by aligning the carbon costs of imports with those of domestic goods. Studies show that BCAs are effective in reducing leakage. With BCAs, leakage falls to 8% on average, compared with a mean value of 12% before BCAs.29 BCAs can influence trade dynamics by harmonizing carbon costs and decreasing trade distortions. An ETS may raise production costs, potentially leading to an increase in carbon-intensive goods from countries with less stringent climate policies.30,31 By rebalancing these incentives, BCAs offset competitive disadvantages created by domestic carbon pricing. A $1 per tonne of carbon dioxide equivalent increase in carbon prices reduces emissions by 1.3% across steel and cement plants, but carbon leakage through international trade offsets roughly 13% of these domestic reductions. 1.4 Private-sector strategic responses under different regimes Companies may need to review supply chains for BCA-covered products. For example, the EU’s CBAM guidance recommends mapping suppliers of in-scope goods by origin and volume, and tracking embedded CO2 emissions,32,33 leading companies to shift towards lower-carbon suppliers or alternative materials to reduce border fees. Guidance from international institutions emphasizes the value of digital emissions tracking systems, which allow companies to centralize data collection across suppliers and comply with emerging disclosure mandates more efficiently.34 Some may consider rerouting trade or relocating production away from high-carbon jurisdictions, but with multiple economies planning similar BCAs, pure avoidance is likely to be a limited strategy. As costs increase, this could prompt a strategic reassessment of long-term supplier viability, with emissions transparency becoming an important factor in determining procurement partnerships. Companies are greening their procurement practices: standard contracts are being updated to include emissions reporting and CBAM-compliance clauses. Thomson Reuters notes the inclusion of clauses requiring suppliers to share embedded emissions data and assume compliance responsibilities.35 As border carbon policies mature, leading multinationals are forming “BCA-aligned procurement coalitions” to coordinate low-carbon sourcing and streamline emissions accounting across jurisdictions.36 As border carbon policies mature, leading multinationals are forming “BCA-aligned procurement coalitions” to coordinate low- carbon sourcing and streamline emissions accounting across jurisdictions. Climate and Competitiveness: Border Carbon Adjustments in Action 9

Climate and Competitiveness Border Carbon Adjustments in Action 2025