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

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.

A green COVID-19 recovery of the EU basic materials sector: identifying potentials, barriers and policy solutions

“…Such approach would combine full carbon leakage protection with an effective carbon price signal to all actors along the value chain. Building on experiences with other consumption charges, implementation would be WTO-compatible and administratively feasible rendering this approach more viable for the recovery period (Ismer et al, 2020).…”

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

“…If there are no free allocations of emission allowances in the EU ETS, the total material-specific carbon costs can be calculated as GHG benchmark multiplied by the market price of a ton of CO2 emitted. If the materials are imported and subject to either a full border carbon adjustment or an excise duty (Ismer et al, 2020), a mass-based liability that corresponds to full domestic supply chain carbon costs would be levied.…”

“…In this section, we quantify carbon leakage risks under an import-only BCA combined with full auctioning. Such an import-only BCA may have a limited coverage of the value chain, in order to limit administrative costs and avoid more than single charging of products in the case of value chains that are integrated across borders (Ismer et al, 2020). Moreover, an import-only BCA has an impact on relative costs of domestic producers in external markets (Evans et al, 2020).…”

“…In section 6, we approximate potential fiscal revenues for the three BCA types characterized by Ismer et al (2020), namely, a border carbon adjustment on imports (Option I), a symmetric BCA with a reimbursement for exports (Option II), and an excise duty or climate contribution (Option III). We assume that free allocation of allowances is abolished under Options I and II, such that full carbon cost pass-through is achieved.…”

A Green COVID-19 Recovery of the EU Basic Materials Sector: Identifying Potentials, Barriers and Policy Solutions

“…A consumption-based approach, by adding a Climate Contribution to the EU ETS, might be more suitable in the short term to create the necessary investment framework [83]. Benchmark-based free allowance allocation for the industry would be continued, but combined with a Climate Contribution, i.e.…”