Policy Options to Address Competitiveness Concerns: Lessons from the EU ETS and Other Trading Systems

The document examines how carbon pricing can lead to 'carbon leakage' and competitive disadvantages for domestic industries. It categorizes policy responses into domestic measures (subsidies, cost containment, and flexibility) and international measures (border adjustments and policy extension). Using the EU ETS as a primary case study, it highlights the risks of free allowance allocation, such as windfall profits and political rent-seeking, while noting that empirical evidence often suggests competitiveness concerns are overstated. It concludes that while border adjustments are theoretically effective, they pose significant risks of trade disputes and diplomatic tensions.

• Competitiveness concerns and 'carbon leakage'—where emissions increase outside a jurisdiction due to domestic carbon constraints—are frequently cited by policymakers, although empirical evidence often suggests these concerns are "overstated or fail to materialize".
• In emissions trading systems, free allocation of allowances is a common tool to alleviate competitiveness fears, but it can lead to "windfall profits" if companies pass the opportunity cost of free allowances to consumers. In the EU ETS first trading period, these profits were estimated at approximately 19 billion EUR.
• The EU ETS experienced a price collapse in 2006 because aggregate emissions were significantly lower than the allocated allowances, partly due to "overly generous allocation decisions by the Member States" and pre-emptive mitigation efforts.
• Border adjustment measures, such as carbon tariffs, can theoretically reduce the leakage ratio by an average of 6 percentage points, but they risk being perceived as "green protectionism" and may trigger trade disputes at the World Trade Organization.
• The EU ETS has evolved toward greater centralization, shifting the responsibility for allowance allocation from Member States to the European Commission for the third trading period (2013-2020) to reduce "domestic lobbying and national favouritism".
• Other emissions trading systems employ different cost-containment strategies: California and Quebec use allowance reserves (4% of allowances) to manage price thresholds, while New Zealand utilizes a price ceiling by offering unlimited allowances at a fixed price of NZ$25.

APA

Mehling, M. (2013). Policy Options to Address Competitiveness Concerns: Lessons from the EU ETS and Other Trading Systems. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2016/01/CS-Mehling-Policy-Paper-2-V2.2-format.pdf

Chicago

Mehling, Michael. Policy Options to Address Competitiveness Concerns: Lessons from the EU ETS and Other Trading Systems. Climate Strategies, 2013. https://climatestrategies.org/wp-content/uploads/2016/01/CS-Mehling-Policy-Paper-2-V2.2-format.pdf.

Wikipedia

{{cite report |last1=Mehling |first1=Michael |title=Policy Options to Address Competitiveness Concerns: Lessons from the EU ETS and Other Trading Systems |publisher=Climate Strategies |date=November 2013 |url=https://climatestrategies.org/wp-content/uploads/2016/01/CS-Mehling-Policy-Paper-2-V2.2-format.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{mehling2013policy, author = {Mehling, Michael}, title = {{Policy Options to Address Competitiveness Concerns: Lessons from the EU ETS and Other Trading Systems}}, institution = {Climate Strategies}, year = {2013}, month = nov, url = {https://climatestrategies.org/wp-content/uploads/2016/01/CS-Mehling-Policy-Paper-2-V2.2-format.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }