Carbon leakage protection : model-based comparison of the macroeconomic effects of different instruments

Abstract

The implementation of the ambitious European Green Deal package and the intensified pursuit of sustainability goals are accompanied by many challenges, particularly for energy-intensive industrial sectors in Germany and the EU. In addition to the rising cost of CO2 certificates as a burden for companies, the transformation of local production requires enormous investments in CO2 emission reduction technologies. In order to accelerate the EU’s transition within the EU-ETS to climate neutrality while maintaining the competitiveness of European companies and avoiding the risk of large parts of the industry migrating to less ambitious regions, the European Commission has decided to replace the current system of free allocation with a Carbon Border Adjustment Mechanism (CBAM). This mechanism is intended to ensure that local companies are not disadvantaged by the CO2 emission costs they have to pay compared to imports from countries with lower CO2 prices (exports are not included in the protective effect of this instrument). This study compares the effects of various protection instruments in terms of macroeconomic indicators and CO2 emissions. In addition to the comparison between CBAM and free allocation, the possibility of establishing a climate club in different design variants to expand the protection of the public climate good and avoid carbon leakage is also analyzed.