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Border Carbon Adjustment and Free Allowances: Responding to Competitiveness and Leakage Concerns

Competitiveness and leakage concerns arise when countries implement climate change policies and measures (PAMs) that other countries do not, or when PAMs differ between countries. These discrepancies lead to different costs for producers, and to concerns that production of goods will relocate to other countries. Such concerns have been sufficient to dilute or even derail proposed environmental policies and measures in the past. This paper explores two of the tools proposed to deal with those concerns: border carbon adjustment and free allowances.