Allocating Emissions Among Co-Products: Implications for Procurement and Climate Policy

A state with climate policy may impose a tax on imported products for greenhouse gas emissions that occur in production and transportation to its border (a so-called border adjustment). A buyer may voluntarily commit to offset its upstream supply chain emissions, with similar effect. When a process yields co-products in fixed proportions, how should emissions from the process be allocated among the co-products? We address that question from the perspective of a border adjustment policy maker and buyer, in turn. Emissions and a buyer’s profit can increase due to border adjustment, or because a buyer is required to use a higher allocation or pay a higher tax (offset price) per unit emissions.