EU in search of a Carbon Border Adjustment Mechanism

Cecilia Bellora and Lionel Fontagné

Energy Economics, 2023, vol. 123, issue C

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.

Keywords: Carbon Border Adjustment; International trade; Climate change (search for similar items in EconPapers)
JEL-codes: F13 F14 F17 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: EU in search of a Carbon Border Adjustment Mechanism (2023)
Working Paper: EU in search of a Carbon Border Adjustment Mechanism (2023)
Working Paper: EU in search of a Carbon Border Adjustment Mechanism (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:123:y:2023:i:c:s0140988323001718

DOI: 10.1016/j.eneco.2023.106673

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