Can border carbon taxes fit into the global trade regime? Bruegel Policy Brief 2013/06, 9 December 2013

One complement to domestic climate policies could be the regulation of carbon dioxide emissions arising during the production of imported products. Such ‘border carbon adjustments’ (BCAs) are said to have several benefits, but are also severely criticised. This Policy Brief highlights some weaknesses in the standard argumentation for BCAs. But there is an alternative argument for border carbon measures, based on the fact that countries expose each other to climate externalities. The reformulated argument is economically more convincing, and provides a more convincing justification for the extraterritorial feature of border carbon measures. However, there are also several important factors mitigating against the implementation of such measures, including the risk that these measures will be used for protectionism. One complement to domestic climate policies could be the regulation of carbon dioxide emissions arising during the production of imported products. Such ‘border carbon adjustments’ (BCAs) are said to have several benefits, but are also severely criticised. This Policy Brief highlights some weaknesses in the standard argumentation for BCAs. But there is an alternative argument for border carbon measures, based on the fact that countries expose each other to climate externalities. The reformulated argument is economically more convincing, and provides a more convincing justification for the extraterritorial feature of border carbon measures. However, there are also several important factors mitigating against the implementation of such measures, including the risk that these measures will be used for protectionism.

Carbon leakage: an overview. CEPS Special Report No. 79, 6 December 2013

Carbon leakage is central to the discussion on climate policy, given the confluence of issues that are currently being debated, including the 2030 Energy and Climate Framework and the review of the EU carbon leakage list by 2014. Carbon leakage is the result of asymmetrical carbon policies, especially carbon pricing, and the resulting carbon cost, which affects the international competitive position of some EU industry and could displace production and/or investment, and the emissions of the activities displaced. This paper identifies the difference between carbon price and carbon cost to leakage exposed industry as one of two fundamental issues to be understood and addressed; lack of visibility on future climate policies and anti-leakage provisions is the other key issue. While this is a global issue, most of the experience has been accumulated in the EU. Carbon leakage is only one of the factors that could affect the competitive position of sectors, but it is difficult to attribute the impact of carbon costs versus other variables such as energy costs, labour, etc. Studies have predicted the risk of a significant amount of production leakage in a number of energy-intensive industries. To address the danger, they were included in the EU ETS carbon leakage list, which gave them access to free allowances. However, a limited number of studies undertaken after the end of the second trading period (2012) show little evidence of production leakage and asks the question whether the issue has not been blown out of proportion. The paper argues that the past may not be a good representation of the future, as it was heavily influenced by a high level of free allocation, the exceptional economic downturn, CO2 prices significantly below what was anticipated, as well as the potential for changes in some fundamental variables such as the shrinking pool of allowances available for free allocation. It emphasises the need for a well-informed debate in the EU on measures to address carbon leakage post-2020, underpinned by a number of options, and objective criteria to evaluate those options. It emphasises that the debate should cover both investment and production leakage, caused by both direct and indirect carbon costs.

Carbon Market Provisions in the Paris Agreement (Article 6). CEPS Special Report No. 128/January 2016

The markets provisions, contained in Article 6 of the Paris Agreement adopted in December 2015, can be seen as both a major success and a minor miracle. Throughout 2015, and during COP21 itself, the prediction was for a very small reference to anything related to markets, or possibly even the total omission of any such reference in the text. As predicted, the markets/non-markets text in Article 6 of the Paris Agreement (PA) was one of the last issues to be agreed, in the last night of COP21, shortly before the text went to the COP President, French Foreign Minister Laurent Fabius, for final approval and its subsequent release to the delegates for acceptance on 12 December 2015. This paper presents the evolution of the ideas contained in Article 6 of the Paris Agreement, and how these were captured in textual form in different drafts of the agreement. Understanding the origin of different provisions in the PA, and their evolution, may prove crucial. Losing the institutional memory may lead to attempts, through re-interpretation of the PA, to renegotiate it.