But a comprehensive border adjustment, in theory, should seek to address all cross-border carbon flows. All the major analyses to date, however, leave out the carbon content of fossil fuels trade, which we refer to as “explicit” carbon.

In our analysis, we show that when only manufactured goods are considered, the U.S. and EU are portrayed as carbon importers because of their “embodied” carbon balance – they import a lot of high-carbon manufactured goods – while China is portrayed as a carbon exporter. That changes when fossil fuels are included.

By assessing the impact of a carbon border adjustment based only on embodied carbon flows, those involving manufactured goods, policymakers are missing a significant part of total carbon traded across their borders – in many cases, the largest part.

In the EU, our findings largely reinforce the current motivation behind a carbon border adjustment, since the bloc is an importer of both explicit carbon and embodied carbon.

For the U.S., however, the results are mixed. A carbon border adjustment could protect domestic manufacturers but harm the international competitiveness of domestic fossil fuels, and at a time when Russia’s invasion of Ukraine is placing renewed importance on the U.S. as a global energy supplier.

The Chinese economy, as an exporter of embodied carbon in manufactured goods, would suffer if its trading partners imposed a carbon border adjustment on China’s products. On the other hand, a Chinese domestic border adjustment could benefit Chinese domestic energy producers at the expense of foreign competitors who fail to adopt similar policies.

Interestingly, our analysis suggests that, by including explicit carbon flows, the U.S., EU and China are all net importers of carbon. All three key players could be on the same side of the discussion, which could improve the prospects for future climate negotiations – if all parties recognize their common interests.

This article is republished from The Conversation, an independent nonprofit news site dedicated to sharing ideas from academic experts. It was written by: Joonha Kim, Rice University and Mark Finley, Rice University. If you found it interesting, you could subscribe to our weekly newsletter.

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Mark Finley does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.