Benefits and Costs of the Ets, a Lesson Learned for the Cbam

The EU is revising its emissions trading system (ETS) and plans to impose a carbon border adjustment mechanism (CBAM) on imports. We evaluate the efficacy of the ETS retrospectively and its anti-competitive effects. We find that the ETS contributed to cut greenhouse gas (GHG) emissions in the EU by 2-2.5 percentage points per year; pricier emissions and more stringent caps accelerated the EU greening process. However, some carbon leakages occurred as declining emissions in regulated industries within the EU were counterbalanced by an intensification elsewhere. Moreover, it burdened companies in regulated industries. For a comparable rise in the emission intensity of production, gross output of companies located in the EU drops more than output of companies outside the EU. In addition, the choice of purchasing high-emission inputs from within the EU translates into a competitive disadvantage for companies located within the EU. The large drop in F-type output when emissions intensity rises might signal companies' enhanced ability to relocate the production of high-carbon footprints intermediates to non-regulated regions. Outsourcing helps dodging the EU green regulation and the strategy becomes increasingly appealing as the sectoral coverage of the ETS is extended. A careful joint design of the CBAM and the ETS thus becomes crucial to avoid the risk of applying the CBAM to a restricted list of imports while expanding the ETS coverage, putting the EU at greater risk of carbon leakages without concretely reducing global emissions