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Border Carbon Adjustments and Industrial Competitiveness in a European Green Deal

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Listed:
  • Evans, S.
  • Mehling, M.
  • Ritz, R.
  • Sammon, P.

Abstract

As part of the European Green Deal, the EU is considering the introduction of a Border Carbon Adjustment (BCA) to ensure that the price of imports into the EU more accurately reflects the environmental costs of their carbon content. BCAs could be an alternative to free allocation to trade-exposed sectors as a measure to address the risk of carbon leakage in the EU’s Emissions Trading System. While a BCA for exports is not categorically excluded, it is less likely to be consistent with WTO rules and therefore less likely to be proposed than an import-only BCA. A key point is that replacing free allocation by an import-only BCA would weaken the competitiveness of EU producers in foreign markets. The reason is that free allocation also helps support the cost competitiveness of domestic products that are exported to markets outside the EU. 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 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.

Suggested Citation

  • Evans, S. & Mehling, M. & Ritz, R. & Sammon, P., 2020. "Border Carbon Adjustments and Industrial Competitiveness in a European Green Deal," Cambridge Working Papers in Economics 2036, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2036
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    References listed on IDEAS

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    Cited by:

    1. Stede, Jan & Pauliuk, Stefan & Hardadi, Gilang & Neuhoff, Karsten, 2021. "Carbon pricing of basic materials: Incentives and risks for the value chain and consumers," Ecological Economics, Elsevier, vol. 189(C).
    2. 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).
    3. 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.
    4. 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.
    5. 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.
    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. Karen Turner & Julia Race & Oluwafisayo Alabi & Antonios Katris & Kim Swales, 2023. "The relationship between a ‘polluter pays’ approach to carbon capture, regional policy and ‘just transition’ employment agendas," Climate Policy, Taylor & Francis Journals, vol. 23(3), pages 366-378, March.
    8. 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.
    9. Tian Lan & Ran Tao, 2024. "Research on the Inhibitory Effect of the EU’s Carbon Border Adjustment Mechanism on Carbon Leakage," Sustainability, MDPI, vol. 16(17), pages 1-21, August.

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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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