Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics

High carbon prices in the EU might drive emission-intensive industrial processes towards countries with relatively lower carbon prices. To prevent such carbon leakage, the EU’s Carbon Border Adjustment Mechanism (CBAM) taxes emissions embedded in imports for the difference between carbon prices in the EU and the origin country. Because embedded emissions are very difficult to measure, CBAM applies to only five industries and accepts benchmarks instead of actual embedded emissions. These simplifications make CBAM tractable but compromise its effect on carbon leakage. We propose an alternative policy that requires no knowledge of embedded emissions and can be applied to all tradable sectors: the Leakage Border Adjustment Mechanism (LBAM). LBAM implements import tariffs (and, possibly, export subsidies) that sterilize the changes in imports (and exports) induced by a higher EU carbon price. LBAM requires information only about domestic output-to-emissions elasticities as well as elasticities of import demand and export supply, which we estimate using publicly available data. We calibrate a granular structural trade model with 57 countries and 131 sectors to quantify the welfare and emission impacts of LBAM. We find that LBAM improves over CBAM in terms of global emissions and EU welfare. We assess how `climate clubs’ of countries that adopt common carbon prices and border adjustments mechanisms perform on these outcomes.

Biography:

Professor Ulrich J. Wagner's research interests are in environmental economics, industrial organization and public economics. He has published his work in leading peer-reviewed academic journals, including the American Economic Review, the Review of Economic Studies, the Journal of Public Economics, and the Journal of Environmental Economics and Management.

Ulrich Wagner is an editorial board member of the Journal of Environmental Economics and Management. He has served as co-editor of the Journal of the Association of Environmental and Resource Economists and of  Economics: the E-Journal. In 2015 he was awarded the 2015 Erik Kempe Award in Environmental and Resource Economics. His research projects are funded by the European Research Council and the German Science Foundation, among others.

He received his doctoral degree in 2006 from Yale University and subsequently worked as a postdoctoral research fellow at the Earth Institute at Columbia University. Before joining the University of Mannheim in 2015, he worked as an Associate Professor of Economics at Universidad Carlos III in Madrid.

Link to Paper: Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics

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