Carbon border adjustment mechanism: a systematic literature review of the latest developments

Abstract

ABSTRACT Carbon border adjustment mechanism aims to level the playing field and reduce carbon leakage through import taxes and/or export subsidies based on the carbon content for products from countries with different levels of carbon policy stringency. The introduction of an EU carbon border adjustment mechanism (CBAM) has triggered a lively debate on its potential impacts, especially among developing countries. In fact, introducing CBAM is not a new idea; researchers in fields of economics and law have investigated this policy over the last decade. Against this backdrop, this study conducts a literature review of the most recent economic studies of CBAM and provides an exhaustive synthesis of this literature. We employ the so-called ‘Preferred Reporting Items for Systematic Reviews and Meta-Analysis’ approach (PRISMA), which includes an exhaustive screening of studies. Specifically, we identified 97 relevant studies on CBAM from 2004 to 31 August 2021, and conducted descriptive and content analysis of these. Our content analysis highlights the potential impacts of CBAM in terms of its effectiveness across 3 policy objectives: protecting fair competition; reducing carbon leakage; and limiting global welfare costs. We synthesize findings on how policy design and characteristics of an economy lead to different levels and types of effectiveness of a CBAM, and we contrast alternative policy designs across various objectives. Armed with this systematic review of the literature, we spell out insights and challenges in formulating effective CBAM polices. This review thus offers evidenced-based guidance for the policy design of a CBAM and a foundation for further research. Key policy insights There is no one-size-fits-all approach to design and implement CBAM to tackle competitiveness and carbon leakage; policy design and characteristics of the economy matter. According to the effectiveness of CBAM across the 3 policy objectives, alternative policy designs should account for the coverage of trade, of sector(s), and also the means to determine carbon content of traded commodities, the use of revenues collected through CBAM, and the adjustment price. In formulating sound CBAM policies, competitiveness, carbon leakage and welfare evaluation are central economic concerns; however, consistency with the latest international climate policy architecture and fairness issues should also be addressed.