Scientists hope the “Brussels Effect”  will create a new future for global carbon pricing.

Earlier this year the European Union extended its domestic carbon pricing to key products from beyond its borders.

The scheme is managed through the “Carbon Border Adjustment Mechanism” (CBAM), under which exporters of polluting goods to the EU must pay a climate tariff, unless their country has its own pricing scheme.

Now a new has found that this could incentivise EU trade partners to adopt carbon pricing as well. In particular Canada, Japan, Taiwan and South Korea are found to be likely candidates, leading to 73 percent more CO₂ emissions being avoided compared to when only the EU applies its climate policy.

The study was led by the Potsdam Institute for Climate Impact Research (PIK), which said the scheme could have a global impact.

“The Carbon Border Adjustment Mechanism is intended to enable the EU industry to decarbonise while remaining competitive – but what happens outside of the EU is not less significant,” explained PIK researcher Timothé Beaufils, the study’s lead author. “We already observe other countries like Brazil or Turkey responding to the CBAM with their own carbon price. We developed a novel framework to estimate this policy diffusion effect. It provides a strong indication that the EU Green Deal has indeed the potential to trigger the reinforcement of climate policies in other countries.”

The study is based on a specially developed economic model that combined two strands of research: trade economics and game theory. Based on their economic interest, trading partners choose between paying the climate tariff into the EU coffers – or implementing their own carbon price and thus joining what the study calls a “climate coalition”. Detailed trade simulations are used to inform these decisions, which depend on the carbon price level, the exact design of the CBAM – and the countries already part of the coalition.

The CBAM carbon pricing on imports currently applies to steel, iron, aluminium, cement, fertilisers, electricity and hydrogen. To assess its incentive effect on international climate cooperation, the research team feeds its calculation tool with empirical data on trade flows for 56 economic sectors and 43 countries. Using these figures, the team models the EU’s climate policy based on a carbon price of 100 dollars per tonne. The model analysis shows some striking ripple effects:

• Without border adjustment, the European carbon price results in a reduction in domestic European emissions of 505 million tonnes of CO₂ per year. Outside the EU, however, emissions increase such that global emissions are only 305 million tonnes lower. This is because other countries move to supply the more energy-intensive products and, moreover, benefit from lower world market prices due to Europe’s phase-out of fossil fuels. EU climate protection therefore has a massive leak – known as “carbon leakage” – offsetting 40 percent of Europe’s emission reduction.

• With the border adjustment, the carbon leakage effect is much smaller, only 15 percent instead of 40 percent before, resulting in as much as 399 million tonnes of CO₂ emissions reduced globally.

• With a policy response from trading partners, the global reduction in emissions is 691 million tonnes, a further 73 percent over and above the impact of the EU climate policy alone. Four countries – Canada, Japan, South Korea and Taiwan – avoid the additional burden of CBAM by implementing their own carbon pricing, thereby joining the climate coalition.

Additional model runs show that extensions of the CBAM to other sectors could make it beneficial for more countries to join the climate coalition, including the US. By contrast, China would currently only participate if the carbon price were below 20 dollars per tonne. While the exact quantitative findings of the study depend on specific model assumptions, the main finding that the EU CBAM triggers the adoption of carbon pricing holds under a broad range of modelling assumptions.

“Our findings support and quantify the hypothesis that the EU CBAM can trigger a so-called Brussels effect,” concluded Leonie Wenz, PIK researcher and a co-author of the study. “What this means is that, due to the EU’s central position in international supply chains, policies adopted in Brussels spill over to outside the EU. Greater climate action leads to even greater climate action. This can play an important role in climate mitigation, especially if international negotiations on climate mitigation stall.”