Climate Change Mitigation and Policy Spillovers in the EU’s Immediate Neighborhood

The European Union (EU) neighborhood countries (EUN) have lagged the EU on emissions mitigation, due largely to coal-heavy power generation and industrial sectors. EUN has also trailed EU countries in emissions mitigation policies since 2000, with little use of market-based instruments, and they still have substantial fossil fuel subsidies. Increasingly stringent EU mitigation policies are associated with lower emissions in EUN. Overall, output effects of the Carbon Border Adjustment Mechanism (CBAM), in its current form, would be limited, though exports and emissions-intensive industries could be heavily impacted. A unilaterally adopted economywide carbon tax of US$75 per ton would significantly lower emissions by 2030, with minimal consequences for output or household welfare, though a safety net for the affected workers may be necessary. To become competitive today by attracting green FDI and technology, overcoming infrastructure constraints and integrating into EU’s supply chains, EUN countries would be well served to front load decarbonization, rather than postpone it for later.