- 23 January 2023
- WORKING PAPER SERIES - No. 2764Details
- The EU is revising its emissions trading system (ETS) and plans to impose a carbon border adjustment mechanism (CBAM) on imports. We evaluate the eﬃcacy of the ETS retrospectively and its anti-competitive eﬀects. We ﬁnd that the ETS contributed to cut greenhouse gas (GHG) emissions in the EU by 2-2.5 percentage points per year; pricier emissions and more stringent caps accelerated the EU greening process. However, some carbon leakages occurred as declining emissions in regulated industries within the EU were counterbalanced by an intensiﬁcation elsewhere. Moreover, it burdened companies in regulated industries. For a comparable rise in the emission intensity of production, gross output of companies located in the EU drops more than output of companies outside the EU. In addition, the choice of purchasing high-emission inputs from within the EU translates into a competitive disadvantage for companies located within the EU. The large drop in F-type output when emissions intensity rises might signal their enhanced ability to relocate the production of high-carbon footprints intermediates to non-regulated regions. Outsourcing helps dodging the EU green regulation and the strategy becomes increasingly appealing as the sectoral coverage of the ETS is extended. A careful joint design of the CBAM and the ETS becomes thus crucial to avoid that applying the CBAM to a restricted list of imports while expanding the ETS coverage puts the EU at greater risk of carbon leakages without concretely reducing global emissions.
- JEL Code
- Q52 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Pollution Control Adoption Costs, Distributional Effects, Employment Effects
Q58 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Government Policy