Impacts of the CBAM on EU trade partners: consequences for developing countries

ABSTRACT

This article analyses the impact of the introduction of the Carbon Border Adjustment Mechanism (CBAM) on European Union (EU) trade partners, focusing especially on its potential socio-economic and external consequences for developing and emerging economies (EMDEs). It uses trade data and Multi-Regional Input-Output (MRIO) matrices to investigate the geographically and sectorally uneven distribution of CBAM’s potential impacts. The introduction of the CBAM by the EU is still under discussion. This mechanism, which seeks to reduce the incentives for firms to outsource their carbon emissions and promote a more generalised low-carbon transition, might disproportionally expose some non-EU economies. In absolute terms, Russia, China, Turkey, and Ukraine are the main EU trade partners in CBAM products, and hence the most exposed countries in external and socio-economic dimensions. In relative terms, the degree of exposure of economies that export CBAM products to Europe varies substantially, with many developing economies having more than 2% of their exports and 1% of their production impacted by this measure. East European economies, mainly in the Balkans, as well as Mozambique, Zimbabwe, and Cameroon in Africa, are the most exposed as far as the external dimension is concerned. In socio-economic terms, we can also include Morocco and Tajikistan to the group of most exposed economies. In the end, promoting the substitution of highly polluting technologies with green technologies seems notably easier in Europe than in EMDEs. Many jobs, tax revenues, and export revenues will be lost if the CBAM is implemented without taking into account the specificities of the EU’s trading partners. We discuss options to mitigate adverse consequences on EMDEs.

Key policy insights:

• The CBAM is a logical complementary policy to the EU-ETS, which aims to avoid EU industries outsourcing their production to countries that do not adopt similar levels of carbon pricing.

• Although most macroeconomic models generally assume that all countries have a relatively high capacity to migrate from one industry to another, evidence shows otherwise. Previous results analysing the impacts of the CBAM might hence have underestimated the consequences for developing and emerging economies.

• Accounting for rigidities in the production structure, we show that the CBAM may have a regressive impact, therefore requiring careful attention to its institutional design, especially if the objective is to reinforce global climate ambitions in line with the EU’s own decarbonisation strategy.

• Promoting the substitution of highly polluting technologies with green technologies seems notably easier in Europe than in EMDEs. Many jobs, tax revenues, and export revenues will be lost if the CBAM is implemented without taking into account the specificities of the EU’s trading partners.

• One possible way to minimise its side effects is to exempt the so-called least developed countries from the CBAM. Rather than an exemption, these countries could also receive targeted support from the EU to reduce their dependence on highly emitting industries, via transfer of technologies, climate subsidies, or concessional lending.

• The adoption of CBAM-like measures in other developed economies, such as Japan and North America, as well as in wealthier developing countries with the capacity to decarbonise their industries, such as China, would exacerbate the fragilities of emerging and developing economies unless counter-measures are taken.

KEYWORDS:

• Low-carbon transition
• macroeconomic vulnerabilities
• country risk
• input-output
• carbon border adjustment mechanism

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 These authors found that the most efficient way to tackle leakage is auctioning combined with border adjustment, which generally induces a negative leakage (a spillover). This holds even if the border adjustment does not include indirect emissions, if it is based on EU (rather than foreign) average emissions, or (for some values of the parameters) if it only covers imports. These restrictions are all included in the current CBAM proposal.

2 See, for example, Fouré et al. (2016), Schinko et al. (2014), Zhong and Pei (2022), Bednar-Friedl et al. (2012), Böhringer et al. (2012), Ghosh et al. (2012), Dhar (2012), Monjon and Quirion (2011b), Kuik and Hofkes (2010).

3 The goods currently selected to fall under the CBAM are those whose emissions are predominantly scope 1, and indirect emissions from energy use or inputs (scopes 2 and 3) are therefore not taken into consideration. If the CBAM is extended to cover more complex goods, these types of embodied emissions may represent a larger share of the products’ emissions, so that it might become important to bring them into the scope.

4 Appendix A.1 expands this brief literature review on existing CBAM impact assessments.

5 Appendix 1 provides a more detailed review of current impact assessments of the CBAM.

6 https://www.consilium.europa.eu/en/press/press-releases/2022/12/13/eu-climate-action-provisional-agreement-reached-on-carbon-border-adjustment-mechanism-cbam/

7 See also (Böhringer et al., 2022) for a meta-analysis of leakage rates in existing simulation studies.