Carbon Border Adjustments

Disparities in carbon pricing and other climate policies across countries can raise the risk of carbon leakage. To address this, the European Union introduced a Carbon Border Adjustment Mechanism (CBAM) which will require importers of certain energy-intensive goods to pay a levy on embedded emissions. This paper combines multiple data sources to measure the coverage of the CBAM in terms of trade flows and emissions and uses an enhanced input-output model to simulate the impact of the CBAM on value added and emissions across sectors and countries, accounting for supply chain linkages. Results show that the CBAM can effectively prevent carbon leakage. However, it only partially mitigates the negative effects of higher carbon prices and free allowances removal on the value added of CBAM-protected industries and negatively affects downstream EU industries.