Climate Protection Scenarios until 2050 Considering CO2 Price Differences and Carbon Leakage. Final Report.

Lutz, C., Banning, M., Paroussos, L., Fragkiadakis D. & Vrontisi, Z. (2025): Climate Protection Scenarios until 2050 Considering CO2 Price Differences and Carbon Leakage. Final Report. Central report on the modelling results within the project "Models for the analysis of international interrelations of the EU ETS and of a CBAM". Climate Change 74/2025, https://doi.org/10.60810/openumwelt-7624.

Abstract

Climate Protection Scenarios until 2050 Considering CO2 Price Differences and Carbon Leakage

Two models with different model philosophies are used to quantify the socio-economic effects of unilateral EU climate action, assuming free allocation as practiced in the EU ETS until 2025, and alternatively full auctioning and the gradual introduction of a CBAM. One model, GEM-E3, is a general computable equilibrium model following neoclassical theory, the other model, GINFORS-E, is a macroeconometric model following a post-Keynesian approach.

The results from both models suggest that an effective CBAM can play a significant role in countering the risk of carbon leakage in the case of unilateral EU climate action. Moreover, a CBAM also has a noticeable positive effect on sectoral production in industry and especially in the sectors covered by the EU ETS, as well as on GDP. In essence, both models show that the carbon leakage risk is no convincing argument against EU climate action, if EU ETS and CBAM are properly designed. The effects on the long-term growth path are also very small, and in both models significantly smaller than the expected negative macroeconomic effects of climate change.

In further sensitivities, various assumptions such as the Armington elasticities, the design of the CBAM (inclusion of indirect emissions, replacing compensation schemes in the EU) and the stronger participation of other countries in climate mitigation are examined. The assumption of higher substitution possibilities of domestic products by imported products slightly worsens the macroeconomic effects for the EU in both models. Different assumptions on Armington elasticities in both models explain at least part of the differences between the model results. The design of the CBAM plays only a minor role. With stronger climate ambition of other countries, the effects on EU GDP worsen slightly.