EU Carbon Border Adjustment

In addition to the reformed EU Emissions Trading System, the EU carbon border adjustment is a key component for balancing international differences in climate ambitions and in the pricing of CO2 emissions and for achieving a climate-neutral EU by 2050. With this instrument, the EU aims to ensure the competitiveness of European producers despite stricter EU climate targets and rising CO2 costs and to reduce the risk of carbon leakage, i.e., the relocation of emissions to countries with less stringent emissions regulations. The model simulations of the study "Trade and Welfare Effects of New Trade Policy Instruments" show that unilateral EU climate policy action can only play a limited role in reducing global CO2 emissions and results in moderate welfare losses. In contrast, climate policy cooperation achieves the greatest global emission reductions and creates welfare gains by avoiding future climate costs. A joint climate club of the EU with the USA, the United Kingdom, Canada and Japan reduces global emissions by 14.8 percent, which corresponds to an annual reduction in CO2 emissions of 5.46 billion tonnes.