Carbon leakage in agriculture: when can a carbon border adjustment mechanism help?

Carbon leakage can undermine the effectiveness of domestic climate policies and, if perceived as a significant risk, could even prevent their implementation. This concern also extends to the agricultural sector, where existing studies indicate a high potential carbon leakage risk. Like in other sectors, governments could use a carbon border adjustment mechanism (CBAM) to reduce this risk. In theory, a CBAM could offer an efficient solution to avoid competitiveness losses by domestic producers and thus reduce carbon leakage. However, the feasibility of implementing such a mechanism remains an open question. Although the literature suggests many CBAM design options, we are unaware of CBAM design proposals for agriculture. To fill this literature gap, this article uses a mixed methods approach to outline the characteristics of an agricultural CBAM (Ag-CBAM) and develop a design that could enhance its administrative, technical, and legal feasibility. We recommend that an Ag-CBAM should only cover carbon pricing policies, acknowledge foreign mitigation efforts, and use carbon price and emission intensity benchmarks. Additionally, we propose that it should cover only imports of products causing the majority of carbon leakage and be limited to emissions along certain life-cycle stages where emissions originate along the food supply chain, and specific greenhouse gases. Finally, our article discusses the potential performance of this CBAM under further criteria, including its effectiveness in reducing carbon leakage, equity, and consistency with the Paris Agreement. The characteristics of the agricultural sector make the design of an Ag-CBAM far from trivial. Designing an Ag-CBAM requires extensive country-specific information to choose among many possible regulatory options. Although countries can improve the feasibility of implementing an Ag-CBAM through finding an suitable design, such an Ag-CBAM could lose its effectiveness in reducing carbon leakage and have further unexpected effects. An Ag-CBAM seems an attractive policy in countries where: carbon pricing policies in agriculture lead to a significant substitution of domestic by foreign products; few imports cause most carbon leakage; most emissions embodied in these imports do not originate in less-developed countries; and uncovered GHG emissions and benchmarks do not substantially reduce its effectiveness in reducing carbon leakage.