Border Carbon Adjustments When Carbon Intensity Varies across Producers: Evidence from California

Governments taxing carbon emissions within their jurisdiction can impose a commensurate tax on emissions embodied in imports in order to mitigate emissions leakage. California offers a rare opportunity to investigate how such a border carbon adjustment (BCA) is working in practice. Experience to date highlights important tensions between greenhouse gas accounting accuracy, market efficiency, and concerns about trade protectionism. We simulate electricity market outcomes under BCA designs that differ in terms of how the carbon intensity of imports is assessed. Simulations suggest significant potential for leakage via resource shuffling. Realized emissions outcomes indicate that this potential has not been fully realized.