Border Carbon Adjustments and Alternative Measures for the EU ETS: An Evaluation

23 Pages Posted: 30 Mar 2020

See all articles by Roland Ismer

Roland Ismer

German Institute for Economic Research (DIW Berlin)

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Alice Pirlot

University of Oxford - Said Business School; Catholic University of Louvain (UCL)

Date Written: March 2020

Abstract

As part of its Green Deal, the European Commission is considering the introduction of border carbon adjustments and alternative measures. The measures, which would primarily apply to basic materials like steel and cement, pursue a double objective: they are aimed at enhancing the effectiveness of carbon pricing for the transition to climate neutrality but also at avoiding carbon leakage risks. When implementing carbon adjustment mechanisms and alternative measures, various design options might be considered to reform the EU Emissions Trading Scheme (EU ETS). In this paper, we have decided to focus on three main models, which help to highlight the main differences between the available options. Under the first model, importers of basic materials would be required to surrender carbon allowances at the level of a product benchmark or, where lower, at the verified level of foreign carbon intensity. In parallel, allocation of free allowances would be phased out. Under the second model, a symmetric adjustment mechanism for exports and imports would be adopted, including refund to exporters for the carbon costs incurred on basic materials embodied in products. Finally, under the third model, the EU ETS would be complemented with a climate contribution charged for materials sold in the European Union (EU) at the product benchmark level related to the carbon intensity of each material. The free allowance allocation regime would then be modified to be directly linked to the volume of material production at the product benchmark level. In order to contribute to the current policy debate, we evaluate for each of these three models, their legality, coherence with EU climate objectives, effectiveness in carbon leakage prevention, potential international implications, as well as their administrative complexity and compliance costs.

Keywords: Carbon pricing, Climate policy, International trade, WTO

JEL Classification: F18,K33,L61,Q58

Suggested Citation

Ismer, Roland and Neuhoff, Karsten and Pirlot, Alice, Border Carbon Adjustments and Alternative Measures for the EU ETS: An Evaluation (March 2020). DIW Berlin Discussion Paper No. 1855, Available at SSRN: https://ssrn.com/abstract=3561525 or http://dx.doi.org/10.2139/ssrn.3561525

Roland Ismer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Karsten Neuhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Alice Pirlot

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

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