Making climate protection competitive

Border Carbon Adjustment (BCA) is the name of a foreign trade instrument. It is intended to mitigate the competitive disadvantages of countries that pursue ambitious climate and environmental policies and reduce counterproductive emissions shifting abroad. An international study by the Energy Modelling Forum (EMF) initiated by the University of Oldenburg under the leadership of economist Prof. Dr Christoph Böhringer now confirms that the instrument can actually significantly reduce the disadvantages for emissions- and trade-intensive industries in these countries and thus also emissions leakage.

The Energy Modelling Forum (EMF) is an internationally renowned platform of experts that deals with important energy and environmental issues and formulates recommendations for economic policy. In the EMF study, twelve groups of experts from research institutions in Germany, the USA, Canada, France, Norway, Austria and Switzerland looked at BCA and examined the economic and emissions-related effects using model-based quantitative analyses.

The global consequences of the man-made greenhouse gas effect make a global climate policy indispensable. However, despite all political efforts, a binding global agreement to reduce greenhouse gas emissions seems a long way off. In order to drive forward climate protection nonetheless, some countries have taken on a pioneering role. They are pursuing ambitious targets for greenhouse gas emissions at national level. However, such a unilateral climate protection policy harbours the risk that industrial companies will relocate their production facilities to countries where the regulations are not effective.

According to Böhringer, one way of counteracting the loss of international competitiveness for emissions- and trade-intensive industries in the regulated countries is to equalise the price of the carbon content of exported and imported goods. "In simple terms, the idea is to levy a tax on the carbon content of imports from unregulated countries. The amount of the levy corresponds to the emissions price or emissions tax of the importing country with a unilateral climate protection policy," explains the university lecturer in economic policy. Conversely, industry should be reimbursed for the emissions taxes paid domestically for exports to non-regulated countries.

BCA could significantly mitigate the negative effects on the competitiveness of emissions- and trade-intensive industries in unilaterally trading countries and thus effectively reduce the shifting of emissions abroad. "From a global perspective, however, the cost savings that can be achieved with Border Carbon Adjustment in climate protection are very low," Böhringer concludes. The main reason for this is that industry-wide BCA does not directly incentivise foreign companies to avoid emissions. "The main effect of the instrument is the - partial - passing on of emission reduction costs to unregulated countries, as they change the real exchange ratios between exports and imports in favour of the taxing countries," says the scientist in the special issue of the international journal Energy Economics, which he edited.

Energy Economics, Volume 34, Supplement 2, Pages S95-S250 (December 2012): "The Role of Border Carbon Adjustment in Unilateral Climate Policy: Results from EMF 29", Edited by Christoph Böhringer, Edward J. Balistreri and Thomas F. Rutherford