EU ETS: Upholding the Carbon Price Without Incidence of Carbon Leakage

Abstract

The internalisation of the social cost of carbon carries regulatory implications, the most significant of which is the loss of competitiveness in both domestic and international markets. The European Union’s ambition for leadership in a global attempt to tackle climate change has exposed its industries to competitive disadvantages. In response to this threat, measures aimed at levelling the playing field between foreign and domestic businesses were enacted in Directive 2009/29/EC. However, whether all of these measures will prove effective remains to be seen, as free allocation of allowances and financial compensation to energy-intensive industries will raise the overall cost to society without conferring any tangible benefits to the environment. On the other hand, the enactment of border adjustment measures (BAMs) is an idea that is not currently favoured by legislators, despite the fact that this option holds significant promise in terms of resolving the problem of carbon leakage.