From the Poverty Reduction and Economic Management Network

of key issues and challenges • Climate change policies and trade policy are on a collision course. Border tax adjustments are at the center of the debate and are being considered in many OECD countries, notably the United States and the European Union (EU). They will tax carbon emissions at the border with the aim of leveling the playing field between countries with different carbon emission limits. • Border tax adjustments may be justified theoretically, but the challenges of implementation and its associated costs and incentives are a key determinant of the outcome. Implementation depends on complex administrative arrangements and controversial calculations of the embedded carbon in imported goods. Border tax adjustment schemes might mine rather than level the playing field. • Implementation problems invite vested interests to influence the policy process and divert border adjustment taxes towards protectionist uses. Decision makers and academics alike have produced little evidence on implementation problems but appear to discuss the very complex border tax adjustment scheme with the implicit assumption that implementation problems can be solved if the need arises. • The implementation problems are linked to the difficulties of calculating embedded carbon. This paper discusses a key question: How accurately can we measure embedded carbon and what will the inherent uncertainty do to trade policy when it triggers political economy forces?