Carbon Pricing and its impact on international competitiveness and carbon leakage: Lessons from EUETS and its implications for GX-ETS

This workshop was chaired by Toshi Arimura (Waseda University) and Morihiro Yomogida (Sophia University), with a keynote address delivered by Prof. Simone Borghesi and five research presentations delivered by RIETI project members.

Keynote Address: Simone Borghesi (European University Institute & University of Siena)
“Competitiveness and carbon leakage under the EU ETS”

Prof. Simone Borghesi (European University Institute & University of Siena) delivered a keynote address on how the EU ETS has addressed issues of international competitiveness and carbon leakage. In his talk, he first pointed out that the EU Emission Trading Scheme (EU ETS) has been gradually tightened (62% reduction by 2030 compared to 2005 level). He then introduced three measures designed to address international competitiveness and carbon leakage, including Free Allowance Allocation, Linking of emission trading markets (Linking) and the Carbon Border Adjustment Mechanism (CBAM).

In particular, the CBAM, which will be fully implemented from January 1, 2026, aims to minimize carbon leakage, maintain competitiveness in heavy industries, and encourage climate mitigation strategies in other countries. At the same time, the CBAM was designed to comply with the WTO and strengthen the EU’s competitiveness. On the other hand, “Green Protectionism” (protection of domestic industries under the pretext of environmental policy), “Green Colonialism” (exploitation of certain countries under the guise of environmental protection), and the risk of trade wars were listed as possible challenges.

Finally, Prof. Borghesi suggested that the impact of CBAM on Japan might be limited. The reasons include the low carbon intensity of Japan’s exports to the EU, low dependence on the CBAM-targeted sectors, and the presence of Japan’s GX Strategy.

After the keynote, Miki Yanagi (IEEJ) provided comments on possible approaches to phasing out free allowance allocation while securing industry understanding, the relationship between market linking in Japan’s ETS and capital outflows, and the connection between export rebates and WTO rules.

(1) Morihiro Yomogida (Sophia University)
“Carbon Tariffs, Emissions Leakage, and Production Relocation”

Morihiro Yomogida (Sophia University) presented the results of an analysis on the impact of border carbon taxes on carbon leakage and the relocation of production bases, using a two-region duopoly model. The analysis shows that a border carbon tax with export rebates can effectively prevent carbon leakage, and that depending on differences in emission intensities between regions, different policies may be necessary to maximize social welfare in the region implementing the carbon tax. On the other hand, for the region that becomes the destination of relocated production, it was also suggested that the imposition of a border carbon tax could potentially worsen social welfare.

Based on this presentation, Ichiro Daito (Keio University) provided comments on the role of export rebates in the analysis, as well as on the assumptions regarding wages and price-setting of goods in the model.

(2) Shiro Takeda (Kyoto Sangyo University)
“Analysis of the EU Carbon Border Adjustment Mechanism Using a Dynamic Computable General Equilibrium Model”

Shiro Takeda (Kyoto Sangyo University) reported the results of his study on the impact of the EU’s CBAM on Japan’s energy-intensive and trade-exposed (EITE) industries, using a dynamic computable general equilibrium (CGE) model. The results suggested that the introduction of CBAM in the EU would have positive effects on the EU’s own EITE industries, as it slightly increases both welfare and GDP. At the same time, reductions in output, welfare, and GDP were indicated for EITE industries in countries such as Russia and India. On the other hand, although a slight negative impact from CBAM on Japan’s EITE industries was demonstrated, the effects on Japan’s overall GDP and welfare were found to be almost negligible.

After the presentation, Masa Sugiyama (University of Tokyo) commented on issues such as the framework for comparing the impacts of Japan’s domestic ETS and the EU’s CBAM, the relationship between EU ETS prices and impacts on Japan, and how CBAM’s design might shape its effects on Japan.

(3) Aline Mortha (Dokkyo University)
“Economic performance, exports and carbon leakage: an analysis of Saitama ETS”

Aline Mortha (Dokkyo University) presented her study on the economic impacts of Saitama Prefecture’s Target-Based Emissions Trading Scheme (Saitama ETS) on the manufacturing sector. The findings suggested that, in the long term, the Saitama ETS could potentially increase wages, employment, output, and value added overall. On the other hand, negative impacts such as employment reductions were found to be more pronounced among small and medium size enterprises and EITE industries, suggesting the possibility of deepening inequality among companies.

Based on the presentation, Nori Tarui (University of Hawaii) provided comments on several points, including whether a causal relationship exists between the Saitama ETS and changes in wages, how to interpret the absence of significant impacts on other variables, comparisons with prior research by Yamazaki (2017, JEEM), and features of the voluntary system, such as the presence or absence of non-compliant firms.

(4) Shinya Kato (Meijo University)
“Economic Impact of Introducing Carbon Pricing in ASEAN: CGE Analysis of the Joint Carbon Market in ASEAN and East Asia”

Shinya Kato (Meijo University) reported analysis results from evaluating the feasibility of an International Emissions Trading (IET) scheme in East Asia, including Japan and ASEAN, using a CGE model. The analysis suggested that introducing IET would significantly reduce CO2 emissions, particularly in ASEAN (by an average of 11% to 12% compared to the BAU scenario), while the impacts on GDP are minimal (within ±0.1%). This indicates that IET in East Asia represents a highly cost-effective mitigation measure. Furthermore, the study suggested that AZEC (Asia Zero Emission Community) could serve as a platform for advancing coordinated emission reduction efforts in East Asia.

Based on the report, Ken’Ichi Matsumoto (Toyo University) provided comments on the feasibility of an IET within AZEC, the institutional design of the IET, model settings, and policy implications suggested by the CO2 emission reductions and GDP impacts.

(5) Masa Sugiyama (University of Tokyo)
“Modeling Japan's Green Transformation: System-wide and Industry Implications”

Masa Sugiyama (University of Tokyo) reported findings from the Japan Model Intercomparison Project (JMIP). Analysis results indicated that Carbon Dioxide Removal (CDR) technologies are essential for achieving the 2050 net-zero target. Furthermore, under severe CDR constraints (100 Mt/year), carbon prices could potentially exceed $700/tCO₂. On the other hand, it was suggested that uncertainties such as hydrogen import prices and CDR availability could potentially have significant impacts on achieving the 2050 net-zero target.

Based on the report, Shinya Kato (Meijo University) commented on the policy priorities for electrification, energy conservation, and CDR used in the analysis model, and the priority for policy support considering the uncertainties surrounding CDR, hydrogen, ammonia, and renewable energy.