PFR Fundamentals: Border Carbon Adjustment Tool

Overview & Synopsis

Overseas carbon pricing to account for embedded emissions from imports—and more broadly climate policies—can pose a transition risk for developing countries. Countries may become increasingly vulnerable to evolving regulatory frameworks, such as consumption-based carbon pricing, which applies carbon costs based on emissions generated during production, regardless of where those emissions occur. Additionally, sustainability certification requirements assess whether products meet environmental standards, such as low carbon footprints or sustainable sourcing practices. Border Carbon Adjustments (BCAs) are a specific form of consumption-based carbon pricing that imposes domestic carbon prices on imported goods based on their production-related emissions. These mechanisms can impact exports from countries with less stringent environmental regulations. The European Union has already implemented a BCA system, while the United Kingdom is set to introduce its mechanism starting January 1, 2027. Other jurisdictions are actively considering similar regulations, suggesting that exposure to BCA-related risks may increase over time.