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Footnote 305 Determining a differential in ambition is easiest with policies that create an explicit carbon price, rendering the latter a natural starting point for a BCA. Less than 20 percent of global emissions are currently covered by an explicit price on carbon, however, and price levels tend to be significantly lower than the cost of compliance with other non-price carbon constraints.

Footnote 306 Over time, as data and methodologies improve, a BCA could seek to adjust for the differential between effective carbon prices faced by domestic and foreign producers in a sector, including both explicit and implicit carbon prices (see Part VI.

Inclusion of policies addressing carbon dioxide emissions would already capture a significant share of emissions associated with imported products, although extension to policies for emissions of other relevant gases and black carbon, converted using accepted global warming potential metrics, could be pursued to successively increase the efficiency of the BCA. Policy coverage has implications for the applicable provisions of the GATT (see Part V.

Because BCAs adjust for differences in embedded carbon and applicable carbon constraints, they also have to include a decision on the scope of included emissions and a methodology to calculate those emissions. Applying a BCA requires first determining (or estimating) the amount of embodied carbon in a given product.

The carbon content of a product can be determined by calculating the emissions from the production process, which involves emissions from energy inputs such as electricity and heat, as well as emissions from the production process itself.

Ideally, this determination would occur at each production facility based on actual emissions. Footnote 307 But direct emissions measurement is not always practicable, and may face legal challenges. Footnote 308 Therefore, measures such as a BCA will generally be based on standardized benchmarks serving as a proxy for the carbon intensity of products, with the benchmark values reflecting average performance, best available technology, or worst available technology in a sector, either at a national, regional, or global level.

For the BCA design proposed here, limiting the scope of emissions to those originating from the production process itself as well as emissions from electricity and heat generated offsite and used as inputs for production will cover a majority of relevant emissions without unduly adding to technical complexity.

A) envisioned focusing on sectors instead of countries, and thereby reducing the link to specific country attributes that might have given rise to accusations of discrimination under GATT Article I (see Part V. Applying the global average emissions intensity of sectors affected by a BCA on imports strikes a balance between legal concerns about a country focus, broader fairness considerations, and the need to provide a sustained incentive for continued emission reductions. Multiple benchmarks may be needed in some sectors to reflect different production technologies.

Because energy is often traded across national borders, and interconnected electricity markets do not always follow political boundaries, determination of indirect emissions should be based on average grid emission factors in electricity markets rather than national averages.

Again, applying this approach helps avoid a legally problematic link to country-specific characteristics, and also better represents the local characteristics of energy supply.

In the absence of suitable or accurate data, a jurisdiction imposing a BCA could also base the determination of embedded carbon on the average direct and indirect emissions intensity of its own domestic goods. Footnote 309 Past policy proposals, such as the 2007 Future Allowance Import Requirement and the 2009 Carbon Inclusion Mechanism proposals (see Part IV.

A), avoided technical complexity and legal risk by basing the calculation of embedded carbon on the average carbon intensity of domestic goods. As aggregate values, however, standardized benchmarks will invariably fail to represent the emissions performance of individual emitters accurately.

Foreign producers should therefore be afforded a transparent, accessible process to document actual emissions with third-party-verified data, and thereby demonstrate that their carbon intensity is lower than a sectoral average benchmark. Footnote 310 Importantly, that option introduces a permissible element of differentiation, which contributes to the leveraging purpose of the BCA and incentivizes mitigation in exporting countries.

It can also raise administrative challenges and strain capacities of some affected trading partners,Footnote 311 justifying allocation of some or all of the revenue to foreign capacity building efforts. A more ambitious-but, given current political realities, probably unattainable-option would involve creating a joint body under the WTO and the UNFCCC to develop a common international standard for the calculation of the carbon content of goods, coupled with a waiver for certain trade restrictive climate policies based on embodied carbon.

Footnote 312 A growing number of multiregional input-output databasesFootnote 313 and ongoing projects such as the Carbon Loophole projectFootnote 314 provide continuously improving datasets for the determination of carbon embedded in internationally traded goods.

Likewise, increasing granularity of life cycle and life cycle sustainability assessment approachesFootnote 315 and standardization of methodologies for quantification of the carbon footprint of productsFootnote 316 are helping provide a more robust body of data for BCA implementation.

Accounting of emissions associated with consumption is now published consistently for a number of countries, and may eventually become a standard component of national environmental accounts. Footnote 317 Once embedded emissions have been calculated, the level of adjustment needs to be determined, factoring in any exemptions and rebates afforded to domestic producers.

As a default, the adjustment will be based on the sectoral benchmark multiplied by an explicit carbon price and the amount of product, which, in the case of a variable carbon price (e. Where no explicit carbon price exists, or the importing jurisdiction has introduced multiple complementary instruments in the covered sector, determination of the net policy differential is considerably more difficult.

In such situations, we suggest identifying the effective carbon price in that sector, and multiplying it by the relevant benchmark. An effective carbon price is the sum of explicit and implicit carbon prices under applicable carbon constraints, and is based on the notion that even policies which do not generate an explicit carbon price-such as a carbon tax or emissions trading system-still impose a compliance cost on covered emitters, based on their marginal abatement cost and the mandated level of emission reductions, as well as a cost to society.

Footnote 318 Determining the effective carbon price applicable to a given sector, that is, the sum of can build on existing methodologies, for instance by correlating energy taxes with the carbon content of the underlying fuels, identifying the average sectoral abatement cost and multiplying it by mandated emission reductions, or using economic models to identify the carbon price needed to achieve mandated emission reductions in a sector.

Footnote 319 Importantly, the BCA is only meant to adjust for the differential between the foreign and domestic climate policy cost in covered sectors.

For that reason, the level of the BCA has to reflect any exemptions, rebates, or free allocation in the importing country, as well as carbon constraints applied to imports in their country of origin, all of which are then deducted from the determined level in order to comply with the non-discrimination principle of GATT Article III (see Part V.

As with the calculation of embedded emissions, moreover, each exporting emitter should be given an opportunity to submit third-party-verified data on marginal abatement cost under all applicable carbon constraints.

A transparent and impartial process involving independent third parties or an international body could help avoid political or judicial challenges. Rather than accrue to the general budget or be recycled to the public, any revenue collected through the application of a BCA can be used to further its environmental objective and benefit developing countries affected by it. To that end, revenue can be partly or entirely allocated to developing countries in order to support domestic climate change mitigation and adaptation efforts as well as build capacity on measurement, reporting, and verification, ultimately favoring the emergence of a more homogenous climate landscape.

Designed this way, a BCA can result in net financial flows to beneficiary countriesFootnote 320 while measurably contributing to the climate finance obligations of implementing countries. Although this can weaken the domestic benefits of introducing a BCA,Footnote 321 it avoids shifting a disproportionate burden on developing countries and being inconsistent with the differential treatment rules under the climate and trade regimes (see Part V.