Alleviating Adverse Implications of EU Climate Policy on Competitiveness

Abstract

This chapter analyzes the environmental and competitiveness implications of introducing border tax adjustments (BTA) and the clean development mechanism (CDM) within the EU Emissions Trading Scheme (ETS). The BTA and CDM have varying impacts on the EU carbon market. The application of BTA within the EU ETS distorts relative export and import prices, thus increasing demand for emission allowances in the regulated sectors and the carbon permit price, but the associated environmental impacts are rather limited. While the overall emission constraints are identical under BTA and CDM, granting access to low-cost abatement options of the CDM to EU ETS participants decreases the domestic abatement of EU member states by shifting parts of it to developing countries, and causes a drop in the EU allowance price.