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A border adjustment for the EU ETS: Reconciling WTO rules and capacity to tackle carbon leakage

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  • Quirion, Philippe
  • Monjon, Stéphanie

Abstract

This article compares several configurations of a border adjustment (BA) to the EU Emissions Trading Scheme (EU ETS) that are designed to maximize their World Trade Organisation (WTO) compatibility, either with the GATT general regime or with Article XX (its environmental exception rule). The different BAs are assessed quantitatively using the partial equilibrium model CASE II, which represents four sectors included in the EU ETS (cement, aluminium, steel and electricity). The main findings indicate that the inclusion of imports and exports would reduce world emissions more than the inclusion of imports alone, that an obligation to buy EU allowances is more compatible with WTO rules than one based on a tax, and would be better at reducing world emissions. Moreover, if the BA is based on best available technologies, more precisely on the recently defined EU product-specific benchmarks, then the adjustment would only be partial and carbon leakage would nevertheless be significantly reduced. The popular view that a BA contributes to both carbon leakage limitation and to domestic production preservation is discussed, and it is argued on the contrary that although a BA would efficiently limit leakage, a decrease in European production of GHG-intensive products is to be expected. Industries that consume cement, aluminium and steel would pay more for these goods with a BA. Consequently, the price signal should be preserved and diffused in downstream sectors, an expected key result of climate policy. On the contrary, free allocation efficiently preserves domestic production, but does not preserve and diffuse the price signal and is less efficient in limiting leakage.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/10122.

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Date of creation: Aug 2011
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Publication status: Published in Climate Policy, 2011, Vol. 11, no. 5. pp. 1212-1225.Length: 13 pages
Handle: RePEc:dau:papers:123456789/10122

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Keywords: Border adjustment; carbon leakage; emission trading system; World Trade Organization;

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References

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  1. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS: Border adjustment or output-based allocation?," Ecological Economics, Elsevier, vol. 70(11), pages 1957-1971, September.
  2. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
  3. Stefan P. Schleicher & Claudia Kettner & Angela Köppl & Gregor Thenius, 2007. "Stringency and Distribution in the EU Emissions Trading Scheme –The 2005 Evidence," Working Papers 2007.22, Fondazione Eni Enrico Mattei.
  4. Kuik, Onno & Hofkes, Marjan, 2010. "Border adjustment for European emissions trading: Competitiveness and carbon leakage," Energy Policy, Elsevier, vol. 38(4), pages 1741-1748, April.
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Cited by:
  1. Qin Bao & Ling Tang & Zhongxiang Zhang & Han Qiao & Shouyang Wang, 2012. "Impacts of Border Carbon Adjustments on China's Sectoral Emissions: Simulations with a Dynamic Computable General Equilibrium Model," CCEP Working Papers 1202, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  2. Jean Fouré & Houssein Guimbard & Stéphanie Monjon, 2013. "Border Carbon Ajustment in Europe and Trade Retaliation: What would be the Cost for European Union?," Working Papers 2013-34, CEPII research center.
  3. Ling Tang & Qin Bao & ZhongXiang Zhang & Shouyang Wang, 2013. "Carbon-based Border Tax Adjustments and China’s International Trade: Analysis based on a Dynamic Computable General Equilibrium Model," Working Papers 2013.17, Fondazione Eni Enrico Mattei.
  4. Branger, Frédéric & Quirion, Philippe, 2014. "Would border carbon adjustments prevent carbon leakage and heavy industry competitiveness losses? Insights from a meta-analysis of recent economic studies," Ecological Economics, Elsevier, vol. 99(C), pages 29-39.
  5. Misato Sato & Karsten Neuhoff & Verena Graichen & Katja Schumacher & Felix Matthes, 2013. "Sectors under scrutiny – Evaluation of indicators to assess the risk of carbon leakage in the UK and Germany," Grantham Research Institute on Climate Change and the Environment Working Papers 113, Grantham Research Institute on Climate Change and the Environment.
  6. Hallegatte, Stephane & Fay, Marianne & Vogt-Schilb, Adrien, 2013. "Green industrial policies : when and how," Policy Research Working Paper Series 6677, The World Bank.

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