CEPII, Recherche et Expertise sur l'economie mondiale
EU in Search of a WTO-Compatible Carbon Border Adjustment Mechanism


Cecilia Bellora
Lionel Fontagné

 Highlights :
  • Climate is a global public good that deserves global action. There is however a tension between ambitious commitments to reduce global Green-House Gas (GHG) emissions and the maintenance of the open multilateral trading system. In absence of a globally coordinated and cooperative policy, the European Commission's ambitious goal of climate neutrality by 2050 will be undermined by carbon leakages.
  • The carbon border adjustment mechanism (CBAM) was adopted on 15 March 2022 by the European Council. It will impose the same carbon price as the one in the European Emission Trading Scheme (ETS) on imported products whose production-related emissions have not been taxed (or not at the same level as in the EU) by the exporter's country.
  • CBAM is effective in reducing carbon leakage. But its design leads to an increase in the price of carbon allowances on the European carbon market. Losses of competitiveness in export markets are to be expected, even for sectors not covered by the EU ETS and the CBAM.

 Abstract :
To meet the targets of the EU’s ”Fit for 55” package, the European Commission proposes to implement a Carbon Border Adjustment Mechanism (CBAM). The CBAM is firstly intended to avoid carbon leakages, but it also deals with the thorny issue of the compliance by European producers in carbon-intensive industries. In addition, its design, as voted by the European Council on March 15, 2022, questions the compatibility of the CBAM with World Trade Organization (WTO) rules. The CBAM puts a price on carbon contained in imported products whose production-related emissions have not been taxed (or not at the same level as in the European Union) by the exporter country, in order to offset the difference in carbon prices at the border. This paper aims to quantify the economic and environmental impacts of different CBAM design choices with the aim of complying with WTO rules. Different from the previous literature, we evaluate the various options with a dynamic general equilibrium model featuring imperfect competition, global value chains, green-house gas emissions and endogenous price of emission quotas. We show that CBAM is effective in reducing carbon leakages. But its design leads to an increase in the price of carbon quotas in the European Emission Trading System (ETS) market. Losses in competitiveness on export markets are expected, also for downstream sectors not covered by the EU ETS nor the CBAM. Eventually, offsetting the difference in carbon prices at the border comes at a cost to the enforcing jurisdiction, suggesting that the CBAM was not designed as a beggar-thy-neighbour policy.


 Keywords : Carbon Border Adjustment | International Trade | Climate Change

 JEL : F14, F13, F17, Q56
CEPII Working Paper
N°2022-01, March 2022

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