Emission Trading System and Border Carbon Adjustment : A Spatial Equilibrium Problem for the European Pulp and Paper Industry in Circular Economy

This paper proposes a spatial equilibrium problem for a pulp and paper supply chain in the combined framework of circular economy and environmental regulations. The developed closed-loop supply chain model accounts for the forest deployment and the production of paper using both virgin pulp and recyclable paper waste, which is collected and re-used. In addition, it describes the exchanges of the commodities available in this closed-loop supply chain, namely virgin pulp, paper, recyclable and not-recyclable paper waste. The aim of the paper is to investigate the impacts of the application of different carbon emission regulations on the costs faced by this circular supply chain and on the volumes of the aforementioned commodities that are produced and traded. The analysis is conducted on the European pulp and paper companies, which have been included in the energy-intensive industries deemed to be exposed to the carbon leakage risk. In this framework, we investigate the effects of the application of the Emission Trading System (ETS) and of Border Carbon Adjustment (BCA) options on import and export flows, which are currently discussed in Europe as measures to mitigate carbon leakage. Sensitivity analyses on carbon price, trade flexibility, and production costs are conducted. Our results show that the EU-ETS induces European companies to resort more on imports of virgin pulp and paper, since their production is subject to the carbon charge. This also implies a larger dependence on goods produced in not-regulated zones that, in turn, leads to a higher exposure to carbon leakage. In contrast, the BCA options reduce the European imports from not-regulated areas, but this causes a general raise of the supply chain costs due to the augment of the local production and the exploitation of internal resources