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The European Union (EU) recently declared its intention to implement a carbon border adjustment mechanism (CBAM) to address carbon leakage and competitiveness concerns associated with elevated climate ambitions in its Green Deal. Current literature points to uncertainties regarding the CBAM's effectiveness and compatibility with international trade rules. This study numerically evaluates how alternative EU CBAM designs under various international reactions affect global and regional GHG emissions, outputs and trade flows. Our modeling results confirm substantial carbon leakages and output reductions in the EU's emissions-intensive trade-exposed (EITE) sectors when implementing the Green Deal. We find that the design of the CBAM matters: while a “non-discriminatory” CBAM based on the EU's own scope 1 emission intensities fails to effectively reduce leakages, an ‘aggressive’ CBAM based on exporters’ scope 1 & 2 emission intensities can achieve such goal (albeit with potentially high implementation cost). International retaliations by non-EU countries can only partially offset the EU's gains from the ‘aggressive’ CBAM, while their cooperation can result in smaller losses to the EU EITE sectors and lower leakages. Finally, the CBAM cannot change within-EU imbalances in the EITE sectors, as several EU members lose EITE outputs consistently in all scenarios with and without retaliations.

Recognizing the urgent need for concrete sectoral information in designing European climate change mitigation pathways of policy relevance, this study formulates, simulates and compares 31 European decarbonization pathways, focusing on changes in trade flows and GHG emissions. This paper exploits the rich sectoral details from a large bottom-up built system dynamics energy model (the European Calculator model), soft-linking it to a tailor-made computable general equilibrium model (GTAP-EUCalc). Our modeling results suggest that increasing decarbonization ambitions leads to higher reductions of greenhouse gas emissions in Europe (EU27 plus the UK and Switzerland), but with the undesirable outcome of decreasing its external competitiveness through worsened trade balance, if the rest of the world does not reciprocate Europe's decarbonization ambition. A comparison of results across pathways with varying ambition levels between demand and supply measures further reveals their differential roles: when keeping demand-side ambitions constant, elevating efforts on the supply side leads to larger emission reductions and bigger decrease in trade balance; however, holding supply-side ambitions unchanged and increasing demand-side efforts improves the trade balance while achieving larger emission reductions. Furthermore, ambitious demand measures avoid more losses of net exports when coupled with more ambitious supply mitigation measures. These results point to the need for coordinated demand and supply climate change mitigation actions across sectors, and to the benefits of climate-friendly lifestyle choices in not only reducing emissions but also in avoiding undesirable trade outcomes. Our results also demonstrate positive associations between increasing reductions in GHG emissions, worsening external trade balance, and rising carbon leakage rate for Europe. To safeguard the global effectiveness of European decarbonization actions, global cooperation under the Paris Agreem

A substantial economic literature has investigated the relationship between greenhouse gases (GHG) and trade. Research indicates that unilateral climate change mitigation can lead to carbon leakages due to e.g. reduced competitiveness on domestic and international markets. The literature also shows contrasting results of the impacts of trade liberalization on GHG emissions. Scholars have also studied the combination of decarbonization policy and trade policy, showing that border carbon adjustments (BCA) can potentially contribute to reducing carbon leakages but can result in undesirable consequences, such as risks of retaliations. Results from the literature studying the relationship between GHG emissions and international trade depend critically on sectoral and regional considerations, suggesting the empirical nature of this relationship. This thesis focuses on the European case, since the European Union (EU) has an ambitious climate agenda (so do UK and Switzerland) and aims at an “open and sustainable” trade policy, thus lending itself well to study the relationship between trade and GHG. In paper 1, the rich sectoral details from a large bottom-up-built system dynamics model are exploited to formulate 31 European decarbonization pathways towards 2050 and a tailor-made computable general equilibrium (CGE) model is used to evaluate their external effects. The results indicate a positive association between increasing reductions in GHG emissions and worsening external trade balance. Increasingly ambitious supply-side decarbonization measures, while keeping demand-side ambitions constant, lead to larger emission reductions and bigger decreases in trade balance. Ambitious demand-side decarbonization measures can avoid more losses of net exports when coupled with increasingly ambitious supply-side measures. In paper 2, the focus is on potential supply-side climate change mitigation practices following dietary transitions in Europe towards a more healthy and sustai

The EU's Green Deal proposal and Farm to Fork strategy explicitly call for both demand and supply measures to reduce food system emissions. While research clearly illustrates the importance of dietary transitions, impacts of potential supply-side measures are not well understood in relation to competitiveness concerns and leakage effects. This study assesses trade and GHG emission impacts of two supply-side mitigation strategies in the EU (plus UK and Switzerland), against a 2050 baseline featuring healthy/sustainable diets adopted by European consumers. To capture potential leakage effects arising from changing external trade flows, two supply-side strategies (intensification and extensification) are assessed against three trade policy regimes, resulting in six scenarios formulated with detailed inputs from the EUCalc model and simulated with a purported-designed CGE model. Our results show that intensification, while improving the EU+2's external trade balance, does not reduce its emissions, compared to the baseline. In contrast, extensification leads to a substantial emission abatement that augments reductions from the assumed dietary transition embodied in the baseline, resulting in a combined 31.1% of agricultural emission reduction in EU+2 during 2014-2050. However, this is at the expense of worsening agrifood trade balance amounting to US$25 billion, and significant carbon leakages at 48%, implying that half of the EU+2's emission reduction are cancelled out by rising emissions elsewhere. Furthermore, implementing the EU+2's prospective regional trade agreements leads to increased EU emissions; however, a border carbon adjustment by the EU+2 can improve its trade balance and partially shifting mitigation burdens to other countries, but ultimately only marginally reduce global emissions (and carbon leakage). Finally, different trade and emission effects are identified between the crop and livestock sectors, pointing to the desirability of a mixed agriculture s

Decision makers increasingly recognise the importance of lifestyle changes in reaching low emission targets. How the mitigation potential of changes in mobility, dietary, housing or consumption behaviour compare to those of ambitious technological changes in terms of decarbonisation remains a key question. To evaluate the interplay of behaviour and technological changes, we make use of the European Calculator model and show that changes in behaviour may contribute more than 20% of the overall greenhouse gas (GHG) emission reductions required for net-zero by 2050. Behaviour and technology-oriented scenarios are tested individually and in combination for the EU plus the UK and Switzerland. The impacts of behavioural change vary across sectors, with significant GHG emission reduction potential and broader benefits. Changes in travel behaviour limit the rising demand for electricity, natural resources and infrastructure costs from the electrification of passenger transport. Adopting a healthy diet reduces emissions substantially compared to intensifying agricultural practices, while at the same time making cropland available for conservation or bioenergy crops. The trade-offs between energy and food may be substantially alleviated when deploying technological and behavioural changes simultaneously. The results suggest that without behavioural change, the dependency of Europe on carbon removal technologies for its net-zero ambitions increases. Structural changes will be necessary to achieve full decarbonisation by 2050, yet changes in lifestyles are crucial, contributing to achieving climate targets sooner.

The "Calculator" models, such as the Global Calculator (www.globalcalculator.org), have been increasingly present in the climate discussions of the EU. Users of these models are provided with direct control over a set of "levers" which represent different GHG abatement ambition levels with respect to behavior, technology or practices patterns in different sectors to formulate their own decarbonization pathways. Built on the existing calculators, the EUCalc (www.european-calculator.eu) is currently under development for testing GHG abatement pathways at the EU and its member states scale. The “core” modules of EUCalc follow the bottom-up “engineering” approach by being very detailed and technology-explicit. However, similar to other BU models, the EUCalc cannot represent all the complex market connections and mechanisms and typical socioeconomic impacts cannot be directly obtained, e.g. ripple effects of an EU member State’s GHG abatement efforts on the rest of EU and on the rest of the world through trade linkages. To address this issue, the EUCalc contains several modules outside of the bottom-up modeling core for assessing the social economic and trade impacts of user-defined decarbonization pathways. To model trade effects, a global CGE model based on the GTAP-E model is used. A major research task is thus to integrate the bottom-up modules with the CGE model by translating the user-defined pathways consisting of "lever settings" at very disaggregated sectoral levels into economic scenarios to be computed in the CGE featuring a much higher sectoral aggregation level and with parsimonious representation of more sophisticated technical relationships. The objective of this paper is therefore to document the modeling efforts in harnessing the rich engineering details in the core modules of EUCalc for formulating scenarios to be simulated in the CGE model. This objective is realized in the paper by using the transport sector as an example., The "Calculator" models, such as the Global Calculator (www.globalcalculator.org), have been increasingly present in the climate discussions of the EU. Users of these models are provided with direct control over a set of "levers" which represent different GHG abatement ambition levels with respect to behavior, technology or practices patterns in different sectors to formulate their own decarbonization pathways. Built on the existing calculators, the EUCalc (www.european-calculator.eu) is currently under development for testing GHG abatement pathways at the EU and its member states scale. The “core” modules of EUCalc follow the bottom-up “engineering” approach by being very detailed and technology-explicit. However, similar to other BU models, the EUCalc cannot represent all the complex market connections and mechanisms and typical socioeconomic impacts cannot be directly obtained, e.g. ripple effects of an EU member State’s GHG abatement efforts on the rest of EU and on the rest of the world through trade linkages. To address this issue, the EUCalc contains several modules outside of the bottom-up modeling core for assessing the social economic and trade impacts of user-defined decarbonization pathways. To model trade effects, a global CGE model based on the GTAP-E model is used. A major research task is thus to integrate the bottom-up modules with the CGE model by translating the user-defined pathways consisting of "lever settings" at very disaggregated sectoral levels into economic scenarios to be computed in the CGE featuring a much higher sectoral aggregation level and with parsimonious representation of more sophisticated technical relationships. The objective of this paper is therefore to document the modeling efforts in harnessing the rich engineering details in the core modules of EUCalc for formulating scenarios to be simulated in the CGE model. This objective is realized in the paper by using the transport sector as an example.

This report lays out the key challenges in linking the EUCalc "core" modules (WP1-5) and the GTAP model (WP7). A conceptual design for interfacing user-defined sectoral lever settings into inputs for GTAP is developed, identifying correspondences between lever settings and relevant GTAP modelling variables, and between EUCalc and GTAP sectoral classifications. The interface designed in this report is necessary for translating the EUCalc sectoral lever settings into compatible data to generate a set of perturbations/shocks mimicking the EUCalc pathways at the aggregated GTAP sectoral levels, in the objective of facilitating the computation of the transboundary impacts., This report lays out the key challenges in linking the EUCalc "core" modules (WP1-5) and the GTAP model (WP7). A conceptual design for interfacing user-defined sectoral lever settings into inputs for GTAP is developed, identifying correspondences between lever settings and relevant GTAP modelling variables, and between EUCalc and GTAP sectoral classifications. The interface designed in this report is necessary for translating the EUCalc sectoral lever settings into compatible data to generate a set of perturbations/shocks mimicking the EUCalc pathways at the aggregated GTAP sectoral levels, in the objective of facilitating the computation of the transboundary impacts.

The US Inflation Reduction Act (‘IRA’) has heralded the advent of a new era of industrial policy within and beyond the US. As the net-zero economy transition unfolds and national economic security paradigms entrench, industrial policy is here to stay. Net-zero subsidies are employed as multi-purpose policy tools to promote domestic manufacturing, de-risk from China, and boost the net-zero transition. This new scenario prompts a fresh look at old questions surrounding environmental subsidies and their justification, actionability and countervailability. This article makes three contributions. First, it articulates a conceptual framework to assess questions surrounding the justification of net-zero subsidies. It advocates a direct focus on their environmental effectiveness, drawing a distinction between justifiable trade-distorting effects and unjustifiable protective or discriminatory application associated with the pursuit of reshoring or geopolitical goals. Second, it employs a careful analysis of different IRA tax credits to operationalize the article’s framework and test its robustness. Third, it draws on legal and economic insights to shed some light on the environmental effects of different groups of net-zero subsidies. On these grounds, it advances a streamlined threefold categorization and demarcates the boundaries within which different subsidies should be justifiable, non-actionable and non-countervailable.