Assessing different European Carbon Border Adjustment Mechanism implementations and their impact on trade partners

Abstract

The European Union (EU) will implement a Carbon Border Adjustment Mechanism (CBAM) to reach its climate mitigation targets while avoiding the relocation of its industries to countries with less stringent climate policies (carbon leakage). The exact implementation and possible future extensions of such an EU CBAM are still being debated. Here we apply a throughflow-based accounting method on detailed trade network data to assess the coverage of different implementation options. Using a stylized comprehensive EU CBAM as benchmark, we then quantify how an EU CBAM may affect the EU’s trade partners by channeling the EU carbon price to other countries. We find that middle- and low-income countries for which the EU is an important export market would be disproportionally impacted even under conservative implementation options. We finally explore different international revenue recycling schemes to make the EU CBAM inclusive toward vulnerable countries and able to foster global climate cooperation.