A simple fix for carbon leakage? Assessing the environmental effectiveness of the EU carbon border adjustment

As part of its ambitious European Green Deal package, which aims to accelerate the EU's transition to climate neutrality, the European Commission has proposed a carbon border adjustment mechanism to address the risk of carbon leakage. In order to evaluate the effectiveness of the measure, this study models and compares three versions of a carbon border adjustment in a Computable General Equilibrium framework. The analysis shows that the Commission's proposal, which does not cover indirect emissions and is limited to imports, would reduce carbon leakage to a similar extent (by around one third) as the current free allocation system, which it would replace. However, it would generate substantial revenues (of up to 32 bn USD annually) that could be used to support low-carbon innovation and international climate finance. The analysis also shows that alternative versions of the carbon border adjustment, which would cover indirect emissions and grant export rebates on carbon costs, would further increase the measure's effectiveness; but that these gains should be weighed against the legal and political risks incurred.

Automated summary

The proposed carbon border adjustment mechanism by the European Commission aims to reduce carbon leakage and generate substantial revenues. The study suggests that expanding the adjustment scope and providing export rebates can further enhance the effectiveness, but the legal and political risks need to be considered.