The purpose of a carbon border tariff is to counteract potential carbon leakage from the sectors that are part of the EU’s emission quota trading system (EU ETS). Through a carbon tariff, importers of goods to the EU will have to buy carbon certificates for all greenhouse gas emissions at a price corresponding to the quota price in the EU ETS. If non-EU producers can show that they have already paid a price for the carbon emissions for the imported goods from a country outside the EU, the corresponding cost should be deducted. The carbon border tariff should cover a broad range of imports of products and commodities covered by the EU ETS, including when embedded in intermediate or final products. Initially, the suggested carbon tariff policy will only be applied to direct greenhouse gas emissions from use of fossil fuels in production. Indirect emissions from production of electricity may be included when a reporting system has been established.

To analyse effects of a carbon border tariff for Norway, the project use Statistics Norway’s World model, SNOW-Global, which is a global multi-region multi-sector computable general equilibrium model based on GTAP (Global Trade Analyses Project) data, with Norway as a separate country. While the database includes 140 regions and 57 sectors, the project mainly studies the effects on Norway and the EU, with key trading partners. All industries that are subject to or affected by the carbon tariff are explicitly represented in this study. The effects on the Norwegian economy and industries of introducing a carbon tariff are compared to a reference simulation of the global economy in the year 2030. The reference simulation includes existing carbon policies in the EU and Norway, and the nationally determined (emission reductions) contributions (NDCs) under the Paris Agreement for all other countries and regions. The current EU ETS includes free allocation of quotas proportional to output (Output-Based Allocation) for industries with high risk of carbon leakage, such as cement, steel, aluminium, paper, glass, chemicals, refined oil products and fertilisers. In the EU’s fit for 55 proposal free quotas are intended to be phased out by 2035. 

Three policy scenarios are analysed: The TARIFF scenario that introduces a carbon tariff and removes all free quotas, the NOLEAK scenario without any explicit anti-leakage policy measures, i.e., without carbon tariff and free quotas, and the HYBRID scenario where the carbon tariff applies at a rate of 50 per cent while the free quota rate is reduced to 50 per cent of the reference simulation full rebate. The HYBRID scenario represents the scheduled phase-out of free quotas and phase-in of CBAM in 2030. We find that the effects on output of introducing a carbon tariff as in the TARIFF scenario are positive for sectors that do not receive free quotas initially such as electricity that increases its output by 0.5 per cent, while sectors initially receiving free quotas mainly reduce their production when their 100 per cent free quotas is substituted by a carbon tariff on direct emissions. The negative activity effect ranges from -0.7 per cent for refined petroleum products and non-ferrous metals, -1.2 per cent for Iron and steel, to -2 per cent for chemical products. On average the effects are quite similar for both Norway and the EU. Some production of goods and emissions in ETS sectors are reallocated from Norway to EU. Global emissions are slightly reduced.

In the HYBRID scenario the effects on the carbon tariff sectors lie somewhere in between the reference simulation and the TARIFF scenario for the sectors that have free quotas in the reference. Electricity has full carbon tariff and no free quotas in the HYBRID scenario since they have no free quotas initially and experience a similar production increase as in the TARIFF scenario. While the global emissions fall in both the TARIFF and HYBRID scenario, the macroeconomic effects for Norway and EU are very small in all the policy scenarios, including minor changes in the EU ETS quota price between the scenarios.