"Carbon border adjustments are an efficient, WTO-consistent tool to prevent carbon leakage"

"). Border carbon adjustments are, however, subject to legal, equity, and effectiveness concerns (Parry and others 2021). Uncertainties surround the compatibility of border carbon adjustments with World Trade Organization rules. Border adjustments may disproportionately affect developing countries’ competitiveness, not least because industries in large emerging market economies often have two to four times the embodied carbon of advanced economy industries—a possible response might be to base the adjustment on domestic industry emission rates for all trading partners. And border adjustments would be far less effective at scaling up global mitigation than a more comprehensive carbon-pricing regime, given they price emissions only in traded products, which are typically less than 10 percent of countries’ total emissions. A border carbon adjustment can help create incen- tives for countries to remain in a pricing regime, rather 23Online Annex 2.5 illustrates potential CO2 reductions under alternative mitigation policies relative to those under carbon pricing. 24The European Council (2022) reached an agreement in March 2022 on “carbon border adjustment mechanisms” to function in parallel with the European Union’s Emissions Trading System. The European Parliament is yet to confirm its position. 25Rebates might be provided to domestic exporters, perhaps tied to industry-level emission-rate benchmarks to avoid undermining firm-level mitigation incentives. than leave and subject their exports to the adjustment by those remaining in the regime. For example, if the United States unilaterally withdrew from a carbon-pric- ing regime in which all other G20 countries partici- pated, then other countries would collect an estimated $13 billion (0.06 percent of GDP) a year on imports from the United States (for a border carbon adjustment based on European Union carbon intensity and a $75 per ton price). If China and India unilaterally with- drew, then revenue collections on their exports would be $62 billion (0.42 percent of GDP) and $9 billion (0.32 percent of GDP), respectively (Figure 2.10). Aside from complicating negotiations, combining a carbon-pricing regime with a border carbon adjust- ment would raise two further issues: •• All participants in the pricing regime would likely need to impose carbon pricing, at least for domestic emis- sions from energy-intensive, trade-exposed industries. China EU-27 United States Other G20 countries Country unilaterally exiting the carbon-pricing regime Sources: IMF, Climate Change Indicators Dashboard, 2022; OECD, Bilateral Trade Database by Industry and End-Use, 2022; and IMF staff calculations. Note: Embodied carbon data are for 2015, and trade flow data are for 2020 (except those for Saudi Arabia, which are for 2018). This figure assumes border carbon adjustment based on country-specific standards and a $75 CO2 price. EU-27 = 27 countries of the European Union; G20 = Group of Twenty. Figure 2.10. Penalties from Exiting Illustrative Carbon-Pricing Regime with a Border Carbon Adjustment, 2020 (Percent of country GDP) Border carbon adjustment penalties create incentives for countries to remain in a carbon-pricing regime. Argentina Australia Brazil Canada China EU-27 India Indonesia Korea Japan Mexico Russian Federation Saudi Arabia South Africa Turkey United Kingdom United States 0 0.5 1 1.5 CHAPTER 2  Coordinating Taxation across Borders 43 International Monetary Fund | April 2022 A country without these emission charges may not be able"

"G20 = Group of Twenty. Figure 2.10. Penalties from Exiting Illustrative Carbon-Pricing Regime with a Border Carbon Adjustment, 2020 (Percent of country GDP) Border carbon adjustment penalties create incentives for countries to remain in a carbon-pricing regime. Argentina Australia Brazil Canada China EU-27 India Indonesia Korea Japan Mexico Russian Federation Saudi Arabia South Africa Turkey United Kingdom United States 0 0.5 1 1.5 CHAPTER 2  Coordinating Taxation across Borders 43 International Monetary Fund | April 2022 A country without these emission charges may not be able, under World Trade Organization rules, to impose charges on embodied emissions for imports. •• A common external border carbon adjustment would need to be agreed upon, which might limit the scope for varying the pricing of industrial emissions according to development levels. Despite the recent proliferation of carbon-pricing schemes, such pricing remains difficult domestically in many countries, not least because of opposition to higher energy prices and the contraction of fossil fuel–reliant activities. A comprehensive strategy with supporting elements can enhance prospects for reform and is especially important in light of recent surges in energy prices. Supports might include, for example, reinforcing pricing with sectoral-based regulations and feebates (which have less of an effect on energy prices), the use of carbon-pricing revenues to equitably boost the economy, robust assistance measures for vulnerable groups, and gradual phase-in of reforms in consultation with stakeholders (for case studies and an analysis of distribution and politi- cal economy issues, see IMF 2013; October 2019 Fiscal Monitor). International policy coordination is, however, essential—and urgent—to overcome obstacles to unilateral action. The immediate priority is continued dialogue on, and supporting analysis of, potential coor- dination regimes. This dialogue could be conducted in parallel through multiple fora, such as the Group of Seven (G7) and G20 (currently under the German and Indonesian presidencies, respectively), the 27th United Nations Conference of the Parties (COP27), and the Coalition of Finance Ministers for Climate Action, as well as through bilateral discussions. Meanwhile, the type of price floor arrangement discussed here might also be implemented at the regional level (for example, several countries in the Latin American region already have carbon taxes, and several countries in the Asia and Pacific region have implemented, or are consider- ing, carbon pricing)—regional price floor arrangements could provide valuable experience for developing a global price floor arrangement. It is pivotal for tax authorities to effectively obtain, verify, and use beneficial-ownership information, which necessitates establishing or accessing beneficial-ownership registries (or alternative mechanisms that are just as effective). Owning or controlling a company or trust as a beneficial owner through complicated ownership structures, using multiple jurisdictions, as well as with no visible or direct ownership stake, allows criminals to hide their identity and the origins of their assets and to commit tax evasion and other crimes. Authorities should assess—and design measures to mitigate—risks from such activities (Table 2.1.1). Table 2.1.1. What Is Beneficial-Ownership Information and How Can Beneficial-Ownership Measures Be Implemented? Definition • Beneficial owner is the natural person who ultimately owns or controls a legal entity (such as a company) or legal arrangement (such as a trust). • Always a person at the end of an ownership or control chain; differs from the concept of legal ownership of an entity (which can be another"