Climate Change Mitigation and Policy Spillovers in the EU’s Immediate Neighborhood

IMF Working Papers, December 1, 2023

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Canonical URL: Climate Change Mitigation and Policy Spillovers in the EU’s Immediate Neighborhood

Authors: Serhan Cevik, Nadeem Ilahi, Krzysztof Krogulski, Grace B Li, Sabiha Mohona, Yueshu Zhao
Published: December 1, 2023
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400259401.001

EU’s neighborhood countries (EUN) have lagged the EU on emissions mitigation; coal-heavy power generation and industrial sectors are a key factor.
EUN have trailed EU countries in emissions mitigation policies since 2000, with little use of market-based instruments, and they still have substantial fossil fuel subsidies.
Increasingly stringent EU mitigation policies are associated with lower emissions in EUN.
Overall output effects of the CBAM, in its current form, would be limited, though exports and emissions-intensive industries could be heavily impacted.
A unilaterally adopted economywide carbon tax of $75 per ton would significantly lower emissions by 2030, with minimal consequences for output or household welfare, though a safety net for the affected workers may be necessary.
To become competitive today by attracting green FDI and technology, overcoming infrastructure constraints and integrating into EU’s supply chains, EUN countries would be well served to front load decarbonization, rather than postpone it for later.

Comparative policy history:
- Since 2000, EUN have used few market-based instruments relative to EU countries.
- Fossil fuel subsidies remain substantial in EUN.
EU policy impacts:
- Tighter EU mitigation policies correlate with lower emissions in neighboring EUN.
- The Carbon Border Adjustment Mechanism (CBAM) in its current form would have limited effects on overall output, but could heavily affect exports and emissions-intensive sectors.
Simulation of unilateral carbon pricing:
- An economywide carbon tax set at $75 per ton is projected to significantly reduce emissions by 2030.
- The same policy scenario implies minimal consequences for aggregate output or household welfare.
- Distributional and labor adjustments: affected workers may require a safety net.

Front load decarbonization to:
- Attract green foreign direct investment (FDI) and technology.
- Overcome infrastructure constraints.
- Integrate into EU supply chains.
Complement carbon pricing with targeted measures:
- Design safety nets and labor transition support for workers in emissions-intensive industries.
- Reduce fossil fuel subsidies and expand the use of market-based instruments to align with EU mitigation policies.