CEPII, Recherche et Expertise sur l'economie mondiale
Border Carbon Ajustment in Europe and Trade Retaliation: What would be the Cost for European Union?

Jean Fouré
Houssein Guimbard
Stéphanie Monjon

 Highlights :
  • A border carbon adjustment in the European Union would imply export losses in the first year of implementation, which would mainly affect the USA (2 billion dollars), Russia (1.8 billion), and China (1 billion).
  • Although small at the macroeconomic scale, these export losses would certainly lead to disputes at the World Trade Organization (WTO).
  • The possible ensuing trade retaliation would entail export losses for the EU focused on agricultural goods, of an order of magnitude of 6 billion dollars, as soon as retaliation begins.
  • Energy intensive and trade exposed sectors in the EU would increase production due to the BCA, compensating for around 20% of the drop due to carbon pricing, at the expense of production by partners. This effect would be magnified in the case of trade retaliation.
  • Other European sectors would be penalized by both the BCA and trade retaliation; whereas consumers' real income would not be significantly impacted, making a BCA more dependent on the political weight of the sectors concerned.

 Abstract :
Unilateral climate policy, such as carbon pricing, represents an additional cost to the economy, especially to energyintensive industrial sectors, as well as those exposed to international competition. A border carbon adjustment (BCA) is often presented as an attractive policy option for countries that want to go ahead without waiting for a global climate agreement. We used the computable general equilibrium model MIRAGE-e to simulate the impact of the introduction of a BCA on imports of energy intensive products in EU and EFTA countries and to evaluate the export losses their main trade partners would suffer. Given that a BCA is a trade measure, it would certainly lead to disputes at the World Trade Organization (WTO). If the BCA is considered illegal, the losses suffered by some partners may justify retaliation, as authorized by a WTO dispute settlement. The overall aggregated impacts of these measures would be negative but marginal, meaning that neither the BCA nor trade retaliation would have a marked impact on consumers’ real income or GDP, while prohibitive retaliatory tariffs are more likely to target sensitive products in the EU. A BCA would ultimately be a signal of the EU’s willingness to maintain an ambitious climate policy.

 Keywords : emission trading scheme | border carbon adjustment | trade retaliation

 JEL : D58, F18, Q56
CEPII Working Paper
N°2013-34, November 2013

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