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EU in search of a Carbon Border Adjustment Mechanism

Author

Listed:
  • Cecilia Bellora

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Lionel Fontagné

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Banque de France - Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

To meet the targets of the EU's Fit for 55 package, the European Commission proposed in July 2021 to implement a Carbon Border Adjustment Mechanism (CBAM) to replace free allocation of Emission Trading System (ETS) allowances for the most trade-exposed emitting industries. CBAM aims to prevent carbon leakage and restore a level playing field in high-emitting industries. Its design, as voted by the European Council in March 2022, by the Parliament in June, and ultimately amended by a provisional agreement between the Council and the European Parliament in December 2022, raises several issues. This paper aims to quantify the economic and environmental impacts of different choices regarding this design. Simulations are based on a dynamic general equilibrium model representing imperfect competition, input–output relations, greenhouse gas emissions, the endogenous price of emission quotas and the presence of free allocation of allowances. We show that CBAM is effective in reducing carbon leakage. But its design increases the price of carbon in the European Emissions Trading Scheme. Competitiveness losses in export markets are expected for downstream sectors that are not covered by the CBAM, as well as for European exporters of high-emitting industries, even in the presence of rebates.

Suggested Citation

  • Cecilia Bellora & Lionel Fontagné, 2023. "EU in search of a Carbon Border Adjustment Mechanism," PSE-Ecole d'économie de Paris (Postprint) halshs-04208558, HAL.
    • Handle: RePEc:hal:pseptp:halshs-04208558
    DOI: 10.1016/j.eneco.2023.106673
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    2. Sun, Ya-Fang & Su, Bin & Zhong, Sheng & He, Junyi & Yu, Shiwei, 2024. "Determinants of Aggregated Embodied Carbon Intensity in Global Bilateral Exports by Firm Heterogeneity," Ecological Economics, Elsevier, vol. 218(C).
    3. Deng, Yirui & Yin, Mengjuan & Xu, Xiaofeng & Yu, Lean & Gao, Guowei & Ma, Li, 2024. "How to develop global energy-intensive sectors in the presence of carbon tariffs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    4. Marialisa Nigro & Massimo De Domenico & Tiziana Murgia & Arianna Stimilli, 2024. "The Port Sector in Italy: Its Keystones for Energy-Efficient Growth," Energies, MDPI, vol. 17(7), pages 1-30, April.
    5. 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.
    6. Lionel Fontagné & Stephen Karingi & Simon Mevel & Cristina Mitaritonna & Yu Zheng, 2024. "Greening the implementation of the African Continental Free Trade Area Agreement," Working Papers 2024-04, CEPII research center.
    7. Wang, Junbo & Ma, Zhenyu & Fan, Xiayang, 2023. "We are all in the same boat: The welfare and carbon abatement effects of the EU carbon border adjustment mechanism," MPRA Paper 118978, University Library of Munich, Germany.
    8. Jia, Zhijie & Wu, Rongxin & Liu, Yu & Wen, Shiyan & Lin, Boqiang, 2024. "Can carbon tariffs based on domestic embedded carbon emissions reduce more carbon leakages?," Ecological Economics, Elsevier, vol. 220(C).
    9. Wang, Kai-Hua & Wang, Zu-Shan & Yunis, Manal & Kchouri, Bilal, 2023. "Spillovers and connectedness among climate policy uncertainty, energy, green bond and carbon markets: A global perspective," Energy Economics, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Carbon Border Adjustment; International trade; Climate change;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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