A plan to shift the EU Carbon Border Adjustment Mechanism's primary goal to stopping carbon leaks

 

To help you as Carbon Border Adjustment Mechanism, the COP28 climate summit's negotiations on the phase-out of fossil fuels highlighted the difficulty of global coordination on climate policies. This editorial argues that the EU's Carbon Border Adjustment Mechanism if it can effectively prevent carbon leakage without causing undue economic harm to Europe's trading partners, could significantly improve current anti-leakage strategies. The authors propose a non-discriminatory, product-specific import tariff, the Leakage Border Adjustment Mechanism, which aims to balance leakage while minimizing administrative costs. The recent COP28 climate summit in Dubai featured negotiations regarding the phase-out of fossil fuels, which once again demonstrated how challenging it is for the community to coordinate their climate policy. Global cooperation is the most effective strategy to achieve net zero greenhouse gas (GHG) emissions from an economic perspective.

As an Carbon Border Adjustment Mechanism, the ensuing higher price on the EU ETS strengthens their incentives to reduce CO2; nevertheless, some companies may decide to move their carbon-intensive production and the corresponding emissions to nations with lower or no carbon costs. In October last year, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), a new policy tool designed to stop this kind of carbon leakage. However, unsolved distributional concerns and free-riding incentives impede this goal (Weder di Mauro, 2023). An expedited timeline for lowering the emissions cap is in place for thousands of manufacturing companies subject to EU Emissions Trading Scheme (EU ETS) regulations’ aims to provide fair competition for domestic and foreign manufacturers of items with high carbon content. It levies import taxes on emissions at a rate equivalent to the difference between the source country's and the ETS's carbon prices.

As one of the leading Carbon Border Adjustment Mechanism, the idea behind CBAM is to conceptually improve the existing policy response to leakage, which has given polluters unfettered and unrestricted access to highly generous transfers of valuable pollution rights (Mauls et al., 2010; Martin et al., 2014). By pricing embedded carbon, CBAM removes distortions that cause leakage and promotes affordable abatement outside EU boundaries (Boehringer et al., 2022). Acquiring the necessary data on each exporter's direct and indirect carbon emissions is challenging (Fowlie & Reguant, 2018). As a result, the EU will only initially apply CBAM tariffs to a small number of energy-intensive industries. Importers may resort to country-specific averages without carbon intensity measures (Bellora & Fontane, 2022). These simplifications make Tackling CBAM feasible, albeit at a significant cost.

 

Being an Carbon Border Adjustment Mechanism, First, unfinished sector coverage encourages the offshore production of unregulated final goods containing intermediates subject to CBAM regulations. For example, by shifting the entire car's production overseas, an EU automaker can escape the CBAM levy on imported steel. Rising ETS costs can destroy the EU industry and exacerbate carbon leakage (Young, 2022). Second, national carbon intensity benchmarks create unfavorable arbitrage, such as exports being rerouted through third nations with lower benchmarks, and lessen the motivation to cut carbon emissions. Suppose one is ready to relinquish the policy's secondary objective of enforcing ETS carbon prices among non-EU exporters and concentrating entirely on carbon leakage. In that case, the challenges with CBAM can be largely overcome.

 

In our opinion as Carbon Border Adjustment Mechanism, we present an alternative policy in Campoli et al. (2023) named the Leakage Border Adjustment Mechanism (LBAM); a non-discriminatory, product-specific import tariff intended to offset leakage precisely. LBAM sterilizes the growth in foreign sales to the EU market when implemented with increased ETS prices’ tariffs are unlikely to stop carbon leakage throughout the spectrum due to these evasion opportunities could have adverse effects on non-EU exporters, not only due to high tariffs that reduce consumer demand for their goods but also because of the costly emissions monitoring and reporting requirements that create additional non-tariff trade barriers. The concern voiced at COP28 that CBAM could disproportionately reduce EU imports from developing and emerging economies needs to be alleviated by such extraterritorial impacts.