EU Emissions Trading Scheme: preventing carbon leakage before and after the Paris Agreement

This chapter examines the question of carbon leakage in context of the EU Emissions Trading Scheme (ETS) after the Paris Agreement. It explains the basic functioning of the ETS and provides an overview of existing measures to prevent carbon leakage under the ETS, namely free allocation of emission allowances based on harmonised rules and benchmarks. It reviews the debate on border carbon adjustments (BCAs) in the EU over the past fifteen years and analyses the impact of the Paris Agreement on the risk of carbon leakage. The chapter also discusses proposals to reform the ETS for the fourth trading period in 2021–2030. It argues that while the Paris Agreement lays down the basic legal structures needed to step up global climate policy efforts, it is far from establishing a global carbon price and levelling the playing field for the manufacturing industry. The chapter highlights, however, that there is currently no evidence of carbon leakage having taken place as a result of the EU ETS and takes a critical stance towards proposals to strengthen carbon leakage protection under the ETS, especially by introducing BCAs.