Carbon Border Adjustment Mechanism in the Transition to Net-Zero Emissions: Collective Implementation and Distributional Impacts

Abstract

As an instrument to minimize carbon leakage, the effects and feasibility of Carbon Border Adjustments Mechanism (CBAM) will depend on multiple design options. While the EU has committed to introducing CBAM as part of its green climate deal, pursuing climate efforts to successfully limit global warming requires a collective implementation involving major emitters China and the US. This paper quantifies the distributional impacts of a joint CBAM implementation of in a climate alliance or a club of the EU, the US, and China. Differing from a myriads of studies that focus on unilateral CBAM, this analysis emphasizes collective implications on leakage, sectoral competitiveness, and welfare by projecting climate neutrality relative to current policies and Nationally Determined Contribution (NDC) targets as reference cases. Our findings confirm that coalition reduces leakage, improves production on energy-intensive industries, and increases club’ welfare relative to a non-CBAM and a unilateral implementation. These are in contrast with some unilateral analytical studies, especially for the US. It is further proof of the potential of CBAM as collective instruments to facilitate mitigation and trade competitiveness.