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GTAP Resource #3509

"Which design of a border adjustment for the EU ETS? A quantitative assessment "
by Monjon, Stéphanie and Philippe Quirion

There is increasing political pressure in several countries to complement more stringent climate policies with some form of border carbon adjustment (BA) which would level the playing field between domestic producers facing costly climate policy and foreign producers with no or little carbon constraint. The arguments mobilized to justify the implementation of such a trade measure generally refer to competitiveness concerns or /and damage of environmental objective, specifically carbon leakage. But, as a trade measure, a BA may be contested by a member of the World Trade Organization. Nevertheless, several recent analyses have concluded that the acceptability of such a measure might be possible, if some conditions were respected.
The aim of this article is to compare several configurations for a BA to the EU ETS defined in order to maximize their WTO-compatibility. These configurations differ depending on the option examined, either the compatibility with GATT general regime, or the recourse to the environmental exception rule of Article XX. The different BA are assessed quantitatively with the partial equilibrium model CASE II which represent four sectors of the EU ETS. We find that the inclusion of imports and of the exports may allow having a bigger impact on world emissions. Secondly, an adjustment on importations consisting in an obligation to buy EU allowances should be more compatible with WTO rules than an adjustment based on a tax. Moreover, an allowance-based adjustment induces more reductions of world emissions. Thirdly, both the import and the export adjustment should be based on the recently defined EU product-specific benchmarks. Lastly, our results highlight a frequent confusion. It is often considered that the same instrument, for instance a BA, contributes both to limit carbon leakage and to preserve domestic production. But, correctly defined, a BA would have good performance to limit carbon leakage, but leads to decrease in European production.

Resource Details (Export Citation) GTAP Keywords
Category: 2011 Conference Paper
Status: Published
By/In: Presented at the 14th Annual Conference on Global Economic Analysis, Venice, Italy
Date: 2011
Created: Monjon, S. (4/7/2011)
Updated: Monjon, S. (6/20/2011)
Visits: 1,292
- Domestic policy analysis
- Trade and the environment
- European Union
- Commonwealth of Independent States

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