The need to reform EU funding and recent political developments such as Brexit and the withdrawal of the USA from the 2015
Paris climate agreement could revitalise the debate about the introduction of border carbon adjustments (BCA) for the European
emission trading system (ETS). The introduction of a BCA would allow the EU to phase out current carbon leakage provisions
of the ETS and to auction off all emission allowances, thus rendering the ETS a more effective unilateral tool to price and
reduce carbon emissions. By using a dynamic new Keynesian (DYNK) model, we estimate that a BCA for the ETS would generate
substantial and stable revenues. Given different assumptions about the development of the carbon intensity of non-EU production
and different BCA designs we find that estimated revenues would suffice to finance between a third and all of current EU expenditures
by the year 2027, thus allowing EU countries to reduce their current contributions to the EU budget accordingly. Administered
at the EU borders a BCA would represent a sustainability-oriented instrument to finance the EU allowing EU member countries
to cut more distortionary taxes such as those on labour, thereby increasing growth- and employment-friendliness of taxation.
The proposed measure could thus contribute to tackle both environmental and fiscal challenges currently facing the EU.