Impact of CO2 compensation scheme jointly with the European Union's Carbon Border Adjustment Mechanism: the case of Norway

Implementation of the European Union (EU)’s Carbon Border Adjustment Mechanism (CBAM) potentially affects related sectors in Norway, particularly the aluminum production sector, the largest producer of primary aluminum in Europe and the largest aluminum supplier to the EU. Currently by a CO 2 compensation scheme, these affected sectors in Norway also receive financial compensation for additional electricity costs driven by higher carbon-intensive electricity generated in the EU under the regulation of the EU Emissions Trading System. This article studies how the Norwegian economy could be influenced by the CBAM and how the impact may be modified by the continuation of the CO 2 compensation scheme using a computable general equilibrium model tailored to the Norwegian economy. We show that proper CBAM implementation enhances the competitiveness of included industries in Norway. This is, however, insufficient to replace the effect of Norway’s CO 2 compensation scheme, particularly with the presence of market failures and regulatory issues like aluminum scrap loophole. Both policies have minimal macroeconomic and distributional effects, while contributing only modestly to global emission reductions.