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Experts evaluate the Border Adjustment Mechanism to be applied soon by the EU

The Barcelona Institute of Economics (IEB) has presented its IEB Report 4/2022, a document coordinated by the professor of the University of Barcelona (UB) José Maria Durán-Cabré. The report analyses a fundamental issue affecting the competitiveness of companies and the fight against climate change: the taxation of CO2 emissions. This publication closes the series of four documents that make up the IEB Report on Fiscal Federalism and Public Finance 2022.

The question of taxing CO2 emissions has generated a long-standing debate on the economic damage that it might cause the competitiveness of a country and, in particular, of the economic sectors with the most intensive energy use. To ensure that taxing the carbon content does not pose an excessive burden, the EU has devised a central measure termed the Carbon Border Adjustment Mechanism to be applied next October. This measure is analysed in the IEB Report by Professor Michael Keen of the University of Tokyo and former Director of the IMF’s Fiscal Affairs Department.

The adjustment mechanism involves equalizing conditions between European companies and others by establishing a tax on imported products equivalent to the domestic tax rate. In this way, European companies are not placed at a disadvantage compared to those of those countries where carbon is taxed less or not at all, and the risk of relocating production to those territories is thus reduced. The greater the disparity in the price of carbon between countries, the greater the impact of border adjustment, and the more ambitious developed countries become, the greater the disparity.

So the objective is to prevent the EU’s efforts to reduce greenhouse gas emissions from being neutralized by imports from third countries that apply less ambitious policies against climate change, and to avoid the relocation of the production or import of carbon-intensive products.

In his analysis, Keen notes that little progress has been made globally in reducing emissions and that carbon pricing initiatives cover only 23% of global emissions. He highlights three very positive elements of the EU initiative: it will eliminate the possibility of an EU country acting on its own; it raises effectiveness insofar as companies will not be compensated by producing abroad or buying from polluting companies; and it encourages other countries to adopt more effective carbon pricing.

The IEB Report 4/2022 includes two other papers. One of them deals with a second issue that has held back carbon taxation, namely the concern about its regressive impact, given that its effect is felt above all in low-income households. This aspect is analysed by Diego Känzig, rofessor at Northwestern University, who points out that the success of the transition towards carbon-free economies depends, to a large extent, on how the costs of these policies are distributed: both direct costs (more expensive energy) and indirect second round (impact on wages and employment).

The third paper, by Mikael Skou Andersen from Aarhus University, addresses the increase in energy prices. Andersen argues that the increase in energy prices in Europe is caused, to a large extent, by the way in which the internal energy market is regulated.