Beggar Thy Neighbor? On the Competitiveness and Welfare Impacts of the EU’s Proposed Carbon Border Adjustment Mechanism

Abstract

Curbing climate change is gaining increasing consensus globally. While many countries seek to set carbon prices, significant price dispersion and policy stringency continue to raise concerns about competitiveness. To address this issue, the EU has proposed a carbon border adjustment mechanism (CBAM), which aims to level the playing field by levying a carbon price on EU imports. Theoretically, this mechanism would reduce the competitiveness of developing countries exports and, therefore, shift the environmental burden from developed regions to the emerging world. In this paper, we estimate the competitiveness and welfare impacts of the EU CBAM, based on the so-called multi-regional input-output approach. We quantify changes in the value of exports to the EU market upon CBAM implementation for both EU members and non-EU countries, plus the rest of the world. It is found that the EU CBAM will lead to a redistribution of competitiveness among countries and regions, while the effect is seen to be more pronounced in emissions-intensive and trade-intensive sectors. Moreover, a deeper sub-national-level analysis on China shows that, given its pervasive domestic production network, income losses in landlocked provinces exceed their export losses, contrasting with the pattern for trade-exposed provinces.