Alleviating Adverse Implications of EU Climate Policy on Competitiveness: The Case for Border Tax Adjustments or the Clean Development Mechanism?

In March 2007, the European Council has agreed upon ambitious climate and energy policy targets for the period after the expiry of the Kyoto Protocol in the year 2012. It envisages reducing greenhouse gas emissions in the EU by 2020 by at least 20% compared to 1990 levels – and by 30% if other industrialized countries undertake similar efforts. Given large divergences among industrialized and developing countries on a potential post-Kyoto architecture, an international agreement on ambitious future abatement targets remains uncertain for the time being. Against this background, unilateral EU environmental policy has caused concerns about adverse competitiveness implications for European energy-intensive and export-oriented sectors. Employing a multi-sector, multi-region computable general equilibrium model of international energy use and global trade, we analyze the competitiveness implications of introducing border tax adjustments (BTA) and the Clean Development Mechanism (CDM) within the EU Emission Trading Scheme (EU ETS). Our quantitative simulation results demonstrate that alternative BTA regimes are suitable to alleviate adverse competiveness implications of unilateral European climate policy on energyintensive and export-oriented industries. However, the regulatory protection of these industries via subsidies for EU exporters and tariffs for non-EU importers goes at the expense of sectors which are excluded from the EU ETS. Our simulations further indicate that even restricted CDM access for EU ETS participants induces comparable output effects for EU energy-intensive and export-oriented sectors as the most ambitious BTA regime. Increasing "where-flexibility" of emission abatement for EU ETS participants via limited access to the CDM can thus be an attractive market-based alternative to the application of border tax adjustments for alleviating adverse competitiveness impacts of unilateral climate policy.

Alexeeva-Talebi, Victoria, Niels Anger and Andreas Löschel (2008), Alleviating Adverse Implications of EU Climate Policy on Competitiveness: The Case for Border Tax Adjustments or the Clean Development Mechanism?, ZEW Discussion Paper No. 08-095, Mannheim.