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Border Carbon Adjustments and Industrial Competitiveness in a European Green Deal

Author

Listed:
  • Stuart Evans

    (London School of Economics)

  • Michael A Mehling

    (CEEPR, Massachusetts Institute of Technology)

  • Robert A Ritz

    (EPRG, University of Cambridge)

  • Paul Sammon

    (London School of Economics)

Abstract

As part of the European Green Deal, the EU is considering the introduction of a Border Carbon Adjustment (BCA) on imports as an alternative to free allocation of emission allowances to reduce the risk of carbon leakage under the EU’s Emissions Trading System (EU ETS). While a BCA for exports is not categorically excluded, it is less likely to be consistent with World Trade Organisation rules and therefore less likely to be proposed than an import-only BCA. In this paper, we show that replacing free allocation by an import-only BCA would weaken the competitiveness of EU producers in foreign markets. Free allocation also helps support the cost competitiveness of domestic products that are exported to non-EU markets. Therefore, a move to import-only BCAs does not necessarily make redundant the continued use of free allocation to help safeguard overall industrial competitiveness. While combining an import BCA with free allocation for exports can increase the risk of legal challenges, such risks may be reduced with an appropriate design. More broadly, policymakers need to navigate a complex trade-off between competitiveness support, a stronger carbon price signal, and extra fiscal revenue.Key policy insights A BCA on imports levels the playing field in domestic EU markets but does not provide competitiveness support to exportsTherefore, a move to an import-only BCAs does not obviate the need for free allocation to safeguard overall industrial competitivenessWhile combining an import-only BCA with free allocation for exports increases the risk of legal challenges, such risks may be reduced with an appropriate design
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Stuart Evans & Michael A Mehling & Robert A Ritz & Paul Sammon, 2020. "Border Carbon Adjustments and Industrial Competitiveness in a European Green Deal," Working Papers EPRG2007, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg2007
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    References listed on IDEAS

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    Cited by:

    1. Perdana, Sigit & Vielle, Marc, 2022. "Making the EU Carbon Border Adjustment Mechanism acceptable and climate friendly for least developed countries," Energy Policy, Elsevier, vol. 170(C).
    2. Wissal Morchid & Eduardo A. Haddad & Luc Savard, 2024. "Measuring the Cost of the European Union’s Carbon Border Adjustment Mechanism on Moroccan Exports," Sustainability, MDPI, vol. 16(12), pages 1-19, June.
    3. Sigit Perdana & Marc Vielle, 2023. "Carbon border adjustment mechanism in the transition to net-zero emissions: collective implementation and distributional impacts," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(3), pages 299-329, July.
    4. Stede, Jan & Pauliuk, Stefan & Hardadi, Gilang & Neuhoff, Karsten, 2021. "Carbon pricing of basic materials: Incentives and risks for the value chain and consumers," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 189.
    5. Michael Mehling & Robert Ritz, 2020. "Going beyond default intensities in an EU carbon border adjustment mechanism," Working Papers EPRG2026, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    6. Olga Navickienė & Ieva Meidutė-Kavaliauskienė & Renata Činčikaitė & Mangirdas Morkūnas & Asta Valackienė, 2023. "The Expression of the Country’s Modernisation in the Context of Economic Environmental Sustainability: The Case of Lithuania," Sustainability, MDPI, vol. 15(13), pages 1-18, July.
    7. Michael A Mehling & Robert A Ritz, 2023. "From theory to practice: determining emissions in traded goods under a border carbon adjustment," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(1), pages 123-133.

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    More about this item

    Keywords

    Border carbon adjustment; carbon pricing; competitiveness; international trade;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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