Carbon border adjustment mechanism challenges and implications: The case of Visegrád countries

Abstract

Stricter climate policies across the European Union are enhancing the phenomenon of free riding by nonacting countries, which translates into carbon leakage and loss of competitiveness. This paper investigates the trade, economic and environmental implications of the future implementation of a carbon border adjustment mechanism (CBAM) in Visegrád countries as EU member states. We exploit trade data to estimate price and income elasticities for emission-intensive trade-exposed (EITE) goods imported from non-EU trading partners to Visegrád countries. Based on these estimates, which are combined with the average carbon intensity of the EU's proposed list of EITE goods, we simulate the implications of six different configurations of restrictiveness of the CBAM imposed on imports from non-EU countries. We find that a high price elasticity and carbon intensity tend to significantly decrease import demand for EITE goods under the CBAM. Moreover, future CBAM implementation will yield a relatively small adverse impact on economic growth in Visegrád countries and a small decrease in total carbon emissions in non-EU countries.