Carbon Border Adjustment Mechanisms and Their Economic Impact on Finland and the EU

Kuusi TeroBjörklund MartinKaitila VilleKokko KaiLehmus MarkkuMehling MichaelOikarinen TuuliPohjola JohannaSoimakallio SampoWang Maria

Abstract

In this report, we address an EU carbon border adjustment mechanism (CBAM) and its economic implications. While a CBAM is proposed as a solution to the EU’s carbon leakage problem, we acknowledge that there are several ways to implement CBAMs, with varying combinations of technical difficulties, administrative burden, legal risks, and risks of political backlash. We construct scenarios in which the CBAM is designed based on feasibility considerations and compare them with broader, but also more complex, alternatives.

Based on our analysis, the CBAM may face major implementation hurdles in its deployment going forward. Thus, the likeliest approach would be to test its use with a narrow set of imported products that are emission intensive which would limit administrative challenges. After considering a feasible alternative, we find that the economic and environmental impact of such a narrow tariff would most likely be small, and such a CBAM would serve more as a signal of the EU’s determination to resolve the carbon leakage problem rather than as a true solution to it.

More ambitious CBAMs will inevitably face difficulties in terms of data collection and administration. Moreover, China in particular will be strongly affected by such CBAMs. Countermeasures could nullify the economic benefits of CBAMs. To avoid the countermeasures, the EU should focus on designing the CBAM in a manner that aims at strengthening multilateral cooperation on climate change.

Publications of the Government´s analysis, assessment and research activities 2020:48.

Information om publikationen

Forskningsgrupp
Makroekonomi och den offentliga ekonomin
Datum
29.10.2020
Nyckelord
Carbon leakage, Carbon border adjustment mechanism, Gravity model, Computable general equilibrium, Global value chains, EU law, International law
Sidor
152
Språk
Engelska
Publikationen i annan publikationstjänst
urn.fi