Download PDF

Technical Note: Carbon Accounting for Traded Goods

01/05/2023 | Maureen Hinman


  • Closing the carbon loophole from imports through carbon border adjustment (CBA) requires accounting for the GHG emissions of products rather than facilities or firms.
  • CBA is contingent on establishing product-specific GHG measurements that comport with the Harmonized System (HS) product classifications used by customs agencies worldwide.
  • Product-specific measurements are an achievable subset of UNFCCC Scope I, II, and III accounting.


Establishing a CBA policy that fairly accounts for the GHG emissions in traded products requires that governments overcome three major technical hurdles:

  1. First, governments must account for emissions from products made domestically and abroad in a manner that customs agencies can administer.
  2. Second, governments must align that accounting with existing customs procedures for collecting trade taxes for goods. 
  3. Third, governments must establish a traceability system to account for the emissions of components in finished goods that originate across the global supply chain.


Life-Cycle vs. Point-of-Production GHG Accounting Methods

Before adopting a carbon border adjustment mechanism, regulators will have to decide how to measure the total carbon content of manufactured products. There are two major schools of thought that govern carbon content calculations: point-of-production analyses (also known as ‘gate-to-gate’ or ‘cradle-to-gate’ analysis) and life-cycle analyses. As the name suggests, point-of-production analyses account for the volume of emissions produced at the site of production, including those from direct energy inputs. Life-cycle analyses, by contrast, are additive and account for the total carbon footprint of a product across the entire value chain, including the emissions produced by the fuel that was needed to distribute the components and final goods as well as those tied to product use and end-of-life.¹

Life-cycle analysis (LCA) methodologies vary greatly between and within international jurisdictions, nullifying equitable accounting of GHG values for both finished products and components across national borders. The starting point and scope of inputs included also vary by methodology, making an ‘apples-to-apples’ comparison of carbon output between countries impractical. Imagine a complex product made of multiple foreign inputs assembled across a global supply chain; the opportunities for tax arbitrage between varied accounting systems are endless (see example provided in Annex 2).

Furthermore, life-cycle approaches are impractical for customs agencies to administer since the product use and end-of-life emissions take place after the border transaction. End-of-life accounting is also likely to be duplicative given existing circular economy border and domestic policies, including end-of-life border fees levied by a number of importing markets. UNFCCC scope analysis is an expanded form of LCA that is appropriate for corporate and national emissions accounting, but which is technically impossible at the product level due to the data acquisition and normalization challenges that arise across corporate entities and jurisdictions.

Point-of-production analyses offer an equitable and transparent approach to international trade. These analyses assign statistical values to how and where products and components were manufactured across global supply chains. This type of accounting is the basis of both the Harmonized System (HS) and trade agreement rules-of-origin that currently facilitate global commerce.²

Customs Compatibility: Calculating Product GHG by Facility, Firm, or National Averages

The unit of calculation for border adjustment— that is, whether products will be taxed based on the average GHG from their originating facility, firm, or nation — is also important, since not all of these units are compatible with customs procedures. Fundamentally, customs agencies must be able to answer two critical questions before they can enter a good into commerce:

  1. First, what is it? Customs agencies account for this using customs nomenclature (more on this under hurdle 2.) 
  2. Second, where was it (and its parts) made? 

For CBAs, the second question becomes: Where was the GHG emitted? By knowing where GHG is emitted, a third critical question for CBA arises:

3. How much was emitted?

Knowing these basics means that governments are limited in both the accounting approaches and units they can reasonably use to adjust for GHG at the border. There are three units proposed for accounting:

  1. By facility, I.e. an individual producing entity.
  2. By firm, or all producing entities within a corporation, including multinational companies producing in different countries.
  3. By a national average of facilities.

These units determine whether customs agencies can answer the critical questions of where something was made and how much GHG was emitted. Figure 2 (above) illustrates the challenges of using firm level units. Since a product would accrue GHG within a firm, it would be nearly impossible for customs agencies to accurately assess border adjustment fees across national borders without increasing the tax complexity beyond what is reasonable for the intended objective of the border adjustment tax. Customs agencies would have to engage in complex accounting of the GHG output of the corporation and then find a means to unpack that output at the product level for every trading firm in the world. Considering the constantly shifting supply chains and ownership of corporate entities, customs agencies would become dependent on corporations, including those not domiciled in the United States, to provide a transparent accounting of an individual product’s emissions. The same would be true for any border adjustment fees paid in other jurisdictions (which are literally out of their jurisdiction), leaving ample room for circumvention and grift, not to mention setting governments up to dispute any credits or other subsidies they might elect to provide their state-owned enterprises. Put simply, customs agencies are not designed to tax corporate units.

Facility level accounting, while technically feasible, would likely harm businesses with a strong compliance culture, since those businesses would have to invest more in compliance administration in order to export. Simultaneously, a facility level CBA approach would create opportunities for both multinational firms and countries with state-directed manufacturing to cabin-in clean componentry for countries that apply a CBA or just cheat on emissions values outright. This would leave many countries without an incentive to clean up the entirety of their domestic production. At the same time, it would do little for developing countries with limited oversight capacity, who would likely become the dumpsters for dirtier products and componentry, and would punish compliant businesses with burdensome administrative costs.

While also technically possible, life-cycle approaches for GHG accounting are similarly difficult for customs agencies to administer. Asking customs agencies to assess prospective taxes for things that have yet to occur in the product’s lifecycle (such as use and end of life) not only violates fair tax theory, which frowns on anticipatory taxation, but puts customs agencies in a position where they are unable to accurately assess prospective taxes, since they cannot answer the fundamental ‘where’ question for those emissions once they lose sight of that individual product after it has been entered into commerce.


Translating Emissions’ Values into the Harmonized System 

Trade requires emissions accounting for products — not for facilities or firms — so that emissions values can be aligned with existing border taxation infrastructure, namely the Harmonized System (HS), and taxes can be assigned and collected. The HS is the statistical backbone of the world trade system. Also known as harmonized customs nomenclature, it is a system of statistics (not unlike the Dewey Decimal System) and corresponding product descriptions that customs agencies and trading businesses use to identify every tangible product on the planet, allowing trade transactions to be swift, fair, and transparently executed and governed across national borders. The HS applies both a statistic (also known as an HS number or code) and verifiable legal description (known as customs nomenclature) to individual items so that there is a shared understanding between national customs agencies and traders of what is being traded and how it should be treated for border tax and regulatory purposes. The HS is organized by a statistical hierarchy, broken down into sector (first two digits and chapter), classification (second two digits and heading), and specific product type (final two digits and subheading). (See Figure 4 below.)

In addition to using the HS to regulate and assign trade taxes and tariffs to products, governments also use the HS to collect and disseminate national trade statistics. The HS is harmonized among the 160 ContractingParties to the International Convention on the Harmonized Commodity Description and Coding System (HS Convention) and is used as the basis of trade transactions by 212 countries and economic unions — that is, all trading nations.³

As the implementers of the HS at the border and as arbiters of border taxes and regulation, customs agencies have developed technical excellence in scientific evaluation and verification of products of every scope in order to administer international trade transactions. For example, the HS identifies smartphones as: ‘8517.13: Smartphones.’ Verifying that a product is in fact a smartphone might require a border agency to conduct a software test to confirm its ability to connect to cellular networks. This test could be used to distinguish a smartphone from a handheld gaming device, which would be found in the HS under ‘9504.50.00: Video game consoles and machines, other than those of subheading 9504.30, and parts and accessories thereof,’ and could be taxed and regulated differently in the country of import. When governments consider new HS language, the technical verifiability of the description is referred to as its ‘customs administrability,’ a matter which preoccupies governments negotiating new language, since it determines whether trade can be conducted in a fair, transparent, and objective way. This issue of customs administrability will necessarily come to fore when governments consider GHG accounting methods for CBAs, as it does for existing border taxes and regulation of imported goods. Since the HS is already the harmonized legal transactional and negotiating language, CBA accounting methods must be both compatible with the HS and consistent between parties.

Figure 5 (above) provides illustrative example of how this would work. For every part of the supply chain, the CBA system must work with the HS system to answer the three critical customs questions: What is it? Where was it made? How much GHG was emitted? In the example in Figure 5, these questions for virgin plastic resin from Brazil are answered as:

Once customs agencies have answered these three questions, a CBA becomes administrable for individual goods from the country of export to the country of import. However, just applying a CBA from points A to B is problematic for products made in a global supply chain. A CBA that deals exclusively with products from the location where the product is finished prior to import for consumption incentivizes producers to relocate their final production processes to carbon-friendly jurisdictions. This enables upstream components to be produced in GHG-intensive jurisdictions without accountability, creating an effectiveness problem for CBAs and an economic problem for high standard countries by incentivizing the offshoring of industry to cheaper, dirtier jurisdictions.


What are Rules of Origin (ROO)?

Effective CBA regimes must account for GHG emissions embodied in complex products with multiple parts that are made in multiple jurisdictions (i.e. across global supply chains). Fortunately, members of the World Trade Organization (WTO) and countries with free trade agreements (FTAs) already maintain systems to identify the origin of a product, known as Rules of Origin (ROO). ROO are legal procedures that customs agencies and trading businesses use to answer the second question — ‘Where was it made?’ — within a global supply chain.

There are several major ROO methodologies in international trade agreements. The primary three are:

  1. A change in tariff heading, using the HS system to determine whether a product has jumped to a new chapter, heading, or subheading.
  2. A determination of the additional value or ‘value added’ that took place in the exporting jurisdiction.
  3. The specific processing operations necessary to give a product its characteristics.

Since ROO determines the taxed value of a good, and there are many different ROO in play across the web of trade agreements, corporations have integrated ROO into their advanced supply chain management software to minimize the border tax burden on their global supply chains. This means that businesses have both a high degree of knowledge of the product transformations that occur across borders in their global supply chains and a wealth of data as to which tax burdens inhibit or facilitate commerce. As a result, businesses know the origin, transformation, value added, processing type, and weight of componentry, and thus can answer the ‘Where’ question that customs agencies need answered for both products and parts.

Effective CBAs will need to establish ROO that account for both products and components. Figure 7 below illustrates how this would work in a situation in which the origin and corresponding GHG for several final products is rolled-upstream across a global supply chain to the point of the raw materials extraction.

Revisiting figure 5, we would then answer the three customs questions for a plastic bottle from China whose resin was produced in India as:


In a forthcoming technical note titled Data Modeling for Interoperable Product Carbon Accounting, weprovide a detailed explanation of how existing regulatory, firm, and trade data can be harvested to develop functional, apples-to-apples product-level GHG emissions data that are fit for the purpose of international trade transactions. Existing customs methodologies — including HS nomenclature and ROO — answer the first two questions of ‘What?’ and ‘Where?’ By developing an interoperable accounting system for products, the United States will be able to answer the final critical question of ‘How Much?’ with fairness and consistency.

Maureen Hinman is the Co-Founder and Executive Chair of Silverado Policy Accelerator.


1) These methodologies should not be confused with national or corporate methodologies which are fundamentally incompatible with the product level assessments required for trade. See Annex I for a detailed background on carbon accounting methodologies.

2) See section titled Hurdle 3 for detailed discussion of rules-of-origin.

3) List of Contracting Parties to the HS Convention and countries using the HS”. World Customs Organizations. Accessed 11-27-2022. 

Annex 1: Carbon Accounting

At its most basic, carbon accounting is the process by which entities measure their GHG emissions in order to quantify their climate impact and set goals to limit emissions.

The main purpose of carbon accounting is to create a framework under which private and state actors can report their GHG emissions to a GHG program, the voluntary initiatives and regulatory programs that measure and compile GHG emissions reports. These programs require entities to report specific information to a GHG inventory for the purpose of setting reduction targets, allocating carbon credits for an emissions trade scheme (ETS), permitting reasons, or just for public recognition. Each program operates in a slightly different manner, depending on the purpose of the accounting and reporting.


Many actors use carbon accounting frameworks, including private corporations, international organizations, and national governments. Each framework is tailored to the specific purposes of the actors. For example, the IPCC Guidelines for National GHG Inventories are targeted specifically at national government actors, whereas the GHG Corporate Protocol is tailored specifically for private corporations attempting to measure their emissions along a supply chain.


Today, the most prevalent accounting frameworks are the IPCC, the GHG Protocol Corporate Standard, and the International Standards Organization (ISO) 14060 family of standards. But there are tens, if not hundreds, of different carbon accounting frameworks and GHG programs that have been built off these frameworks.

The main difference between various carbon accounting frameworks is their aggregation level, or the level at which the GHG emissions are reported. In general, carbon accounting frameworks use one of four aggregation levels: product/project level, facility level, corporate level, and national level. Aside from aggregation level, accounting frameworks can differ in the type of gases covered, whether the program is voluntary or mandatory, the program type, and the type of emissions recorded (direct vs. indirect). Given the range of possible permutations for measurement, the lack of interoperability across frameworks can lead to ‘apples-to-oranges”’ comparisons, particularly when trying to measure the emissions content of similar products which use differing carbon accounting frameworks.

The above Venn diagram depicts how the GHG Protocol, IPCC, and ISO compare across their covered gases, boundary definitions, estimation method, and guideline principles. As the diagram shows, none are completely compatible with one another, with the IPCC and ISO being similar only in their estimation methods, while the GHG Protocol and the ISO cover the same gases. Meanwhile, the GHG Protocol and IPCC only overlap on their guideline principles.


Let's follow a regular coffee cup as it moves along two separate but connected supply chains to understand how each framework would aggregate and then report those emissions to a GHG program or inventory. For the purposes of this example, we will specifically look at the carbon accounting principles employed by the IPCC Guidelines, the GHG Protocol Corporate Standard, and the EU-ETS.

Each of the above frameworks uses different boundary definitions for reporting emissions, and therefore aggregates at different levels:

IPCC Guidelines: Calculated at the national level. In this example, the emissions reported for the USA are 18 MT CO2e, where Germany is equal to 3 MT CO2e, and France is 8 MT CO2e.

GHG Protocol: Calculated at the corporate level. The total Scope 1, 2 and 3 emissions for Company A in this example is equal to 22 MT CO2e, while Company Bs is 12 MT CO2e.

EU-ETS: Calculated at the facility level. In this example, the reported emissions will be on a site by site basis. The testing facility will report 1 MT CO2e, while the packaging facilities will report 3 and 2 MT CO2e, for Companies A and B, respectively. The electricity generation site will also report its emissions of 5 MT CO2e.


Carbon accounting is a fundamental tool for accurately calculating and comparing emissions across international borders. As a consequence, it is critical for setting the emissions reduction targets that will be necessary to achieve international climate goals and to design and monitor national or plurilateral carbon pricing or carbon trading systems.

As we can see above, the calculated output of emissions will vary greatly depending on the boundary definitions of the carbon accounting framework. Relying on the various permutations of carbon accounting systems as a basis for preventing carbon leakage will also lead to extreme difficulties in making apple-to-apples comparisons, potentially giving cover to protectionist motives and planting the seeds for trade disputes.

For this reason, understanding the frameworks is an absolutely essential precondition to crafting a national regime—whether that includes a carbon price, ETS, carbon border adjustment mechanism, or negotiations with other countries towards a plurilateral or multilateral solution.

Annex 2: A Comparison

Here, we’re taking a deeper dive into the differences between the European Union (EU) ETS and the California ETS, because they are two functioning systems designed to be fit for trade purposes. However, even these schemes take such divergent approaches to measuring emissions that, all else being equal, the respective emissions calculations applied to annual raw steel production leads to substantially different results. In a world where the same steel product is traded across borders and divergent carbon measurements are used to calculate the border tax of steel, the value will be skewed—in both directions. Let us explain.

The EU ETS and California ETS both use a cap-and-trade system, and each use different forms of carbon accounting that companies employ on an annual basis to verify the amount of carbon credits they need to purchase to cover their emissions. The EU ETS calculates using basic emissions (i.e. GHG that is emitted during manufacturing, so call, ‘end-of-pipe’ emissions) and oxidation factors (i.e. the actual amount of fuel combusted during industrial processes). The California ETS uses a complex formula that multiplies inputs by their carbon content, including specifications for the molecular weight and volume of gas inputs. How an equation is structured is important–it’s like building a wall, where each brick adds to the stability of the overall structure - let’s look at how the California and EU systems compare. The EU’s simplified system of carbon accounting does not take into account as many factors as the California ETS, which, as one might expect, will lead to different results when each system is applied to the same product. See the below illustration showing the EAF steel equations used by the EU ETS compared to the California ETS, where one brick represents one variable within the equation.

To illustrate this point, we applied both the California ETS and EU-ETS to a scenario for annual raw steel production. Assuming that steel is produced either through an electric arc furnace (EAF) or a blast oxygen furnace (BOF) and that each production method accounts for 50% of an equal annual output of steel between the EU and California, the graphic below illustrates the outcomes for total emissions per one ton of raw steel between the two systems:

In theory, both the California ETS and EU ETS should yield similar results because they both represent 50% of total emissions under this scenario. Nonetheless, the EU’s share of emissions under its accounting scheme is roughly one-quarter of California’s under its accounting scheme. The EU ETS relies mostly on default emissions and oxidation factors and does not separate equations by technology type, leading to a large difference in outcomes between it and California for identical products under identical manufacturing conditions.

A Patchwork of National ETS and Carbon Pricing Systems Falls Short When it Comes to International Trade - A New Paradigm is Needed

Now, imagine these equations were the basis for determining a fair carbon border tariff for steel that is either imported into the US from the EU or vice versa. The use of this “apples-to-oranges” comparison in international trade would result in a mismatched system of border fees that would, in effect, form a border wall to imports under some systems while creating a border hedgerow in others for identical products. Such carbon tariff inversions would let carbon escape by failing to fully account for carbon outputs across jurisdictions and by creating an incentive to game those differences through trade transactions.

As the world starts to adopt cross-border climate measures, ETS systems are simply not fit for purpose when applied to international trade. The intent of an ETS was to create a market to reduce carbon emissions, not track and tax products as they move along a global supply chain. Indeed, the EU recognizes this as it has proposed a CBAM for purposes of traded goods rather than use its ETS system. However, the EU’s proposal still does not fundamentally address the issue of interoperability since it is not scaled to the HTS and does not provide a common measure on which to base border fees. Moving forward, a new trade paradigm is needed that aligns to the HTS and allows for “apples-to-apples” comparisons at the product level. Linking international trade and climate policy will be essential for any emissions reduction strategy and will be essential for comparing emissions globally.