The political economy of carbon border adjustment in the EU

Abstract

The European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) to enable ambitious climate policies in EU member states and to incentivize emission reductions in other countries. This paper adopts a dynamic, multilevel, polycentric perspective to discuss how domestic as well as foreign interest groups would be affected by the policy. Our analysis yields three central insights. First, diplomatic efforts should be focused on a small number of countries that would be most severely affected by the CBAM. Second, the CBAM should be implemented as an enabler of domestic mitigation efforts in an open climate alliance instead of an attempt to extend EU climate policy to other countries. Third, gradually phasing in the CBAM while phasing out free emission permits for EU producers and supporting the transformation of carbon-intensive sectors in third countries can ease political opposition from domestic as well as foreign industries.