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

Listed author(s):
  • Stephanie Monjon

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

  • Philippe Quirion

    ()

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

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 ET'S (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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Paper provided by HAL in its series Post-Print with number hal-00715462.

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Date of creation: 2011
Publication status: Published in Climate Policy, Taylor & Francis, 2011, 11 (5), pp.1212--1225. <10.1080/14693062.2011.601907>
Handle: RePEc:hal:journl:hal-00715462
DOI: 10.1080/14693062.2011.601907
Note: View the original document on HAL open archive server: https://hal-enpc.archives-ouvertes.fr/hal-00715462
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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