We discuss with Prof. Harald Fadinger (University of Mannheim) how the EU taxes the carbon content of imported goods via its Carbon Border Adjustment Mechanism (CBAM).
We critically review the effectivenes of CBAM to prevent "carbon leakage", i.e., the international reallocation of production to locations with low carbon prices, and its effect on the international competitiveness of EU firms. CBAM appears to perform badly on both of these and a number of other fronts.
We also discuss alternative approaches for international carbon price adjustments, partly based on research by Harald and his coauthors:
"Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics", by A. Campolmi, H. Fadinger, C. Forlati, S. Stillger and U. Wagner.
The Week That Was in Europe