Which design of a border adjustment for the EU ETS ? A quantitative assessment.

We compare several options for a border adjustment to the European Union Emission Trading System. We discuss their WTO‐compatibility and provide a quantitative assessment based on the partial equilibrium model CASE II. We conclude that, firstly, if the EU wants to implement such a border adjustment, it should cover imports and exports rather than only imports, in order to maximise the impact on world emissions. Secondly, the import part should consist in an obligation to buy EU ETS allowances rather than a tax, in order to maximise both the WTO‐compatibility and the impact on world emissions. Thirdly, both the import and the export adjustment should be based on the recently defined EU product‐specific benchmarks. However, while border adjustments tackle leakage efficiently, they are much less efficient than free allocation to mitigate the decrease in EU production in GHG‐intensive sectors. Moreover they exacerbate the price increase of GHG‐intensive products, which is detrimental to downstream industries.