Direct versus embodied emissions: Criteria for determining the carbon coverage for border carbon adjustment

For effective and practical implementation of border carbon adjustment, it is crucial to determine the carbon content of imports/exports. In this paper we discussed two criteria. One is direct carbon emissions, which accounts for direct emissions generated from production. The other is embodied emissions which accounts for the total emissions generated directly and indirectly in the supply chain. By simulating Japan’s carbon tax policy and three border tax adjustment measures, we found that Japan’s carbon tax policy cannot effectively address domestic mitigation, nor create real threats to carbon leakage and international competitiveness. To design effective and WTO-compatible carbon adjustment measures, it is important to ensure that the emissions criteria are identical to the carbon coverage defined by domestic carbon policy.