While views on the use of Border Carbon Adjustment (BCA) diverge it can be said that the strategic implications figure prominently in the debate. In this paper BCA is examined in a strategic setting. Using a standard one-sector, two-country partial equilibrium model with climate damages from emissions, I examine how BCA affects government incentives in a game where trade and climate policies are chosen endogenously. I show that in a sequential strategic setting, where both home and foreign's climate policy change with the BCA, that the impact of a BCA is not necessarily the adoption of stronger climate policy.
The climate policy response depends on the strategic complementarity of the emission taxes and the BCA. If the policies are strategic complements then the BCA results in stronger unilateral climate policy. On the other hand, if the policies are strategic substitutes, then the BCA results in the exporter adopting a weaker climate policy.
I also demonstrate that a BCA can very well result in stronger climate policy when the strategic aspect is excluded meaning the climate policy of the trading partner is held constant in the BCA. The paper also characterises the difference between a BCA and a carbon tariff in this strategic setting.