Carbon Pricing of Basic Materials: Incentives and Risks for the Value Chain and Consumers

30 Pages Posted: 18 Mar 2021

See all articles by Jan Stede

Jan Stede

German Institute for Economic Research (DIW Berlin)

Stefan Pauliuk

University of Freiburg

Gilang Hardadi

Aalborg University

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Date Written: March 2021

Abstract

For the European Union to realise its ambition of carbon neutrality, emissions from basic material production need to be reduced through low-carbon production processes, material efficiency and substitution, as well as enhanced recycling. Different reform options for the EU ETS are discussed that ensure a consistent carbon price incentive for all these mitigation options, while avoiding the risk of carbon leakage. This paper offers a first quantification of potential carbon leakage risks, distributional implications and additional revenues associated with different mechanisms: an import- only border carbon adjustment (BCA), a symmetric BCA, and an excise for embodied carbon emissions at a fixed benchmark level in combination with continued free allocation. We estimate the product-level carbon intensities for about 4,400 commodity groups, including basic materials, material products, and manufactured goods and compute implied price changes and cost increases relative to gross value added to assess the scale of carbon leakage risks.

Keywords: Emissions trading, border carbon adjustment (BCA), excise duty, carbon intensity, carbon leakage, distributional effects, fiscal revenues

JEL Classification: F18,C67

Suggested Citation

Stede, Jan and Pauliuk, Stefan and Hardadi, Gilang and Neuhoff, Karsten, Carbon Pricing of Basic Materials: Incentives and Risks for the Value Chain and Consumers (March 2021). DIW Berlin Discussion Paper No. 1935, Available at SSRN: https://ssrn.com/abstract=3806327 or http://dx.doi.org/10.2139/ssrn.3806327

Jan Stede (Contact Author)

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

Mohrenstraße 58
Berlin, 10117
Germany

Stefan Pauliuk

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

Gilang Hardadi

Aalborg University

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Karsten Neuhoff

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

Mohrenstraße 58
Berlin, 10117
Germany

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