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Different effects of carbon pricing and border adjustment in Germany and Spain

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  • Hinterlang, Natascha

Abstract

This study examines the effects of carbon pricing in Germany, Spain, and the broader European context using the dynamic, three-region environmental multisector general equilibrium model, EMuSe. Our findings indicate that unilateral carbon pricing in Germany or Spain leads to a sustained negative output. The marginal increase in production costs outweighs modest reductions in emissions. However, when Europe collectively adopts carbon pricing, the long-term output effects become positive, although there are more significant transition costs due to close trade relations within Europe. We find evidence of carbon leakage, which is marginally mitigated by a border adjustment mechanism. However, this mechanism mainly protects domestic carbon-intensive sectors and produces inconsistent country outcomes; Germany gains, while Spain loses. Notably, Spain’s energy sector emerges as a long-term beneficiary due to its relatively lower emission intensity. The findings highlight the strategic importance for Europe to engage global partners in carbon pricing as it reduces the economic downturn phase and increases long-term gains.

Suggested Citation

  • Hinterlang, Natascha, 2024. "Different effects of carbon pricing and border adjustment in Germany and Spain," Economic Modelling, Elsevier, vol. 141(C).
  • Handle: RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324001974
    DOI: 10.1016/j.econmod.2024.106840
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    Cited by:

    1. Delgado-Téllez, Mar & Quintana, Javier & Santabárbara, Daniel, 2025. "Carbon pricing, border adjustment and renewable energy investment: a network approach," Working Paper Series 3020, European Central Bank.

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    More about this item

    Keywords

    Carbon pricing; Border adjustment; Climate clubs; International dynamic general equilibrium model; Sectoral heterogeneity; Input–output matrix;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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