Carbon Border Measures: What Happens
with Ambitious Climate Policies?
Billy Pizer (RFF)(joint work with Joe Aldy, RITE, and EIEE)ALPS International Symposium
March 3, 2022

If some countries pursue mitigation policies, andothers do not, how much do competitiveness effects
and emission leakage undermine those policies?
• 30+ years of research on whether emission reductions in somecountries might lead to emission increases (leakage) in othercountries• Lower fossil fuel prices• Relocation of manufacturing (“competitiveness” impacts)• General result from older work:• Not much effect except in a few industries.
• E.g., ~1% of production shifts abroad at $15 per ton CO2 for most energy
intensive (0.25 energy as a share of costs) industries.
• But this research focused on policies equivalent to <$50 per ton CO2.
• EU prices now exceed that level and could go higher. Policies to reach netzero by 2050 would require prices in excess of $100 per ton CO2.

2PizerWhat happens when some countries pursue
ambitious, net-zero mitigation policies andothers do not? Can BCAs help?
• Question: How much do ambitious, net-zero policies (>$100 ton) adverselydrive production (and emissions) to less ambitious jurisdictions?
• Can border carbon adjustments (BCAs) attenuate these effects?
• Our effort: Model ambitious policies in EU + different assumptions in othercountries (ranging from achieving Nationally Determined
Contributions/NDCs to “0”).
• Examine leakage (emissions) and competitiveness (manufacturing) withand without border measures.
• Use two models EIEE-ICES & RITE-DEARS model. Multi-sector, multi-region
models with considerable energy detail and international trade.
3PizerScenarios for analysis
Scenario
Club1 (NDCs)
Club1-CTAX0
Club1-CTAX0 + BCA
Club2-CTAX0 + BCA

4PizerClub Members(“ambitious”)

Description

Club1 with reduction target and RoW with Carbon prices from NDCs
EuropeClub1 with reduction target and RoW free rides / zero carbon price
EuropeClub1 with reduction target and RoW with C.Price= 0 + BCA
Europe, USA, Japan Club2 with reduction target and RoW with C.Price = 0 + BCA
EuropeSummary results• When the rest of the world (ROW) meets their NDCs—which cap
emissions–there is no leakage (in terms of emissions rising). There
are still large competitiveness effects because of different carbon
prices and shifting production patterns.
• When the ROW “free rides,” there is significant leakage from EUemission reductions (up to 50%) and competitiveness effects (up to5%).
• BCAs attenuate competitiveness effects, but not leakage (which isdriven by lower fossil prices prices).
• A larger club attenuates leakage and—when carbon prices areequalized in the club—competitiveness.
5Pizer2030 reduction from baseline (%)

All Countries Implement NDCs -- "no leakage"50454035302520151050Europe

Japan
RITE-DEARS

6PizerROW
EIEE-ICESUS

EU implements NDCs, others “free ride”
2030 reduction from baseline (%)

50403020100-10Europe

Japan
RITE-DEARS

7PizerROW
EIEE-ICESUSEU implements NDCs, others “free ride”
2030 reductions from baseline (tons)

2000
1500
1000
5000-500

EuropeJapan

ROW-1000
RITE-DEARS
8Pizer

EIEE-ICESUSBCA and expanded club—effect on leakage
2030 reductions from baseline (tons)

2500
2000
1500
1000
5000-500

EuropeJapan

ROW-1000
Free Ride
9PizerBCA

BCA, US+Japan join EUUSPizer

12Δ Net Imports, scaled by Production, %421006812-2-2-10-8-2-4-6Δ Production, %0-122-10-8-4-2-6Δ Production, %02-12-10-8Europe Paper_Pulp-2-4-6Δ Production, %02LegendFree riding

Δ Net Imports, scaled by Production, %4210068Δ Net Imports, scaled by Production, %42100681212Europe NonMetalMin

ICES: Club + Free-riding

NDC

ICES: Club + NDC

BCAICES: Club + BCA

US & Japan join EU in carbon club
ICES: Expanded Club + BCA-210Europe Chemicals

Δ Net Imports, scaled by Production, %421006812Δ Net Imports, scaled by Production, %4210068-2-12-2BCA & expanded club—effect on competitiveness

Europe NonFeMin

Europe Iron_Steel-12-10-8-2-6-4
Δ Production, %02-12-10-8-2-4-6Δ Production, %02Conclusions• High ambition in the EU, with weak policies elsewhere, leads tosignificant leakage and competitiveness effects (though not muchbeyond extrapolation of earlier results).
• These are really two different problems with different solutions:• Leakage is reduced by having emission limits—however weak—in all keycountries.
• Competitiveness is reduced when carbon prices are equalized by a BCA orharmonized carbon prices.

• This suggests that high ambition in a small group of countries may bepolitically and practically limited without (a) BCAs and/or (b) minimal
action in a larger group of countries.
11PizerThanks!
Billy Pizer
www.rff.org
pizer@rff.org

ALPS International Symposium
March 3, 2022

Significant heterogeneity in carbon pricing

13Pizer

EU carbon price rose by 3-4x in the last year

14Pizer