Addressing climate change through unilateral action: The implications of adopting a European Union-wide Border Carbon Adjustment

University essay from Lunds universitet/LUCSUS

Abstract: In the European Union’s (EU) Emissions Trading Scheme (ETS), free allocation of emissions allowances to avoid carbon leakage has resulted in a distorted pricing signal and a failure to reduce emissions in the most polluting industries. A Border Carbon Adjustment (BCA), a mechanism which would apply a tariff to imported goods based on their embedded carbon content, has been suggested as a solution. Various concerns have been raised regarding the potential EU-wide BCA, including its questionable compatibility with trade law, limited effectiveness in reducing carbon leakage and the tendency to shift the burden of climate change mitigation from industrialised to developing countries. In this thesis, I undertake a systematic literature review to identify the implications of adopting an EU-wide BCA. The findings are evaluated against three criteria: feasibility, effectiveness, and fairness. Regarding feasibility, the analysis finds that while it is theoretically possible to design a BCA compatible with the World Trade Organisation (WTO) rules, it is still likely to get challenged by at least some of the EU’s trade partners. Regarding effectiveness, a BCA has the capacity to reduce carbon leakage, but cannot eliminate it if introduced unilaterally by the EU. Regarding fairness, a BCA is found to shift the burden of climate change mitigation towards developing countries. The negative distributional impact of the BCA can be mitigated by using the revenue to fund climate change and clean technology initiatives in developing countries. Overall, the findings raise questions regarding the trade-offs between the BCA’s feasibility, effectiveness and fairness as well as the possibility of designing truly effective market mechanisms under the existing WTO rules.

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