Conference Agenda

Relative prices determine competitiveness of different locations. In this paper, we focus on the role of regulatory differences between Germany and other EU countries which affect the shadow price of carbon emissions. We calibrate a Melitz-type model, extended by firms’ emissions and abatement decisions using data on aggregate output, trade and emissions. The parameter estimates are estimated from the German Manufacturing Census. The quantitative model allows us to recover a measure of how regulatory stringency evolved in the EU and Germany in terms of an implicit carbon price paid on emissions. This price reflects energy and carbon prices in addition to command-and-control measures and decreased from 2005 to 2019 in most sectors – both in Germany and other EU countries. The trend is more pronounced in Germany than in the rest of the EU. In counterfactual analyses, we show that this intra-EU difference has substantially increased German industrial emissions. Had the EU experienced the same decrease in implicit carbon prices as Germany, German emissions would have been substantially lower. Germany has increasingly become a pollution haven.

Recently, EU has proposed a carbon tariff at the border (CBAM – Carbon Border Adjustment Mechanism) as part of its Fit for 55 policy. Through the CBAM, importers of goods to the EU will have to buy so-called carbon certificates for all GHG at a price corresponding to the quota price in the EU ETS. We analyse the effects of introducing a CBAM inspired by EU’s proposed CBAM for the small open economy Norway and the larger coalition EU, where extensive carbon policies already exist and Norway’s carbon policies are linked to EU’s, using a global, multi-region and multisector CGE model. We find that the effects of introducing CBAM are positive for sectors that are part of the EU Emission trading system (ETS) that do not receive free quotas (OBA) initially as electricity, while sectors initially receiving free emission quotas as non-ferrous metals, iron and steel, chemical products and refined oil products experience a negative output effect when their free quotas are substituted by CBAM on direct emissions. The effects are quite similar for both Norway and the European region. Further, there is a tendency for the CBAM tariff to be lower on goods imported from developed countries, as these countries tend to have more stringent greenhouse gas emissions regulation and then higher CO2 prices. Thus, the consequence of a CBAM is likely more severe for developing countries.

This paper investigates the elusive role of productivity heterogeneity in new trade models in the trade and environment nexus. We contrast the Eaton-Kortum and the Melitz model with firm heterogeneity to the Armington model without heterogeneity and show that if firms have a constant emission share in terms of sales --- as they do in a wide range of trade and environment models --- the three models' emission predictions exactly coincide. On the other hand, if firms have a constant emission intensity per quantity --- a prominent alternative in the literature --- the emission equivalence between the three models breaks. We provide a generalization that nests both constant emission shares in sales and constant quantity emission intensities as special cases. We calibrate the models to global production and trade data and use German firm-level data to estimate the key elasticity of how emission intensity changes with productivity. Our multi-industry quantification demonstrates that firm heterogeneity increases the emission effect of international trade: While trade with heterogenous producers lowers the average emission intensity of production due to reallocation to more productive and cleaner firms, this is more than outweighed by a corresponding increase in the overall scale of production.

Reshuffling --- defined as changes in the pairing of buyers and sellers with the aim of reducing emissions taxation without changing total emissions --- has received increasing attention in the policy debate surrounding the EU's Carbon Border Adjustment Mechanism (CBAM). This paper develops a theoretical framework to discuss the conditions under which reshuffling takes place. The results highlight the importance of two underlying channels for reshuffling: capacity constraints and raw material input prices. These novel insights are then applied to the current EU CBAM debate. Structural overcapacity could mitigate reshuffling in the steel sector, for which the risk has been frequently discussed. However, the main raw material for low carbon steel --- scrap --- is inelastic in supply. Thus, increased demand for scrap could increase both its prices and the cost of low-carbon steel, making such steel profitable only if it is redirected to the EU market. While a similar analysis applies to aluminium, cement, another CBAM sector, appears to be less threatened by both channels of reshuffling.