ETCLIP – The Challenge of the European Carbon Market: Emission Trading, Carbon Leakage and Instruments to Stabilise the CO2 Price. Effects of Different EU Climate Policy Scenarios on International Trade and Carbon Leakage

Despite slow progress on international post-2012 climate policy architecture, the EU will expand its emissions trading scheme (the EU ETS) beyond 2020. Three major modifications are planned: 1. auctioning as the initial allocation mechanism (with some exemptions for energy intensive, trade exposed sectors), 2. broader sectoral coverage, and 3. increased stringency of reduction targets. Due to this unilateral approach, emission reductions achieved in the EU might be partially offset by emission increases in non-regulated countries, a phenomenon known as carbon leakage. To contest this claim, we employ a multi-regional Computable General Equilibrium model for Austria and its main trading partners to analyse the consequences for output, international trade and carbon emissions of different unilateral EU climate policy options as well as climate policy architectures which extend towards other Annex I countries. For Austria, we find that any of the unilateral policies affects exports and imports more strongly than domestic production, moreover imports decline more than exports, particularly in energy intensive sectors.