The case for carbon leakage and border adjustments: where do economists stand?

While the EU is working toward the implementation of the world’s first Carbon Border Adjustment (CBA) Mechanism, a gap remains between the ways in which carbon leakage and CBAs are discussed in policy spheres and economic evidence on these topics. The aim of this paper is to bridge this gap by presenting the EU’s policy context, systematically reviewing the economic literature on carbon leakage and CBAs, and discussing potential future research avenues. Three channels of leakage are identified in our literature review: the competition, energy and innovation channels. The main finding of this paper is that while the competition channel is well understood and taken into account by policymakers, the energy and innovation channels are generally not considered. Policy recommendations are provided to better account for these two channels.