Evaluating the EU Carbon Border Adjustment Mechanism with a Quantitative Trade Model

This paper examines the economic and environmental impacts of the European Carbon Border Adjustment Mechanism (CBAM). We develop a multi-country, multi-sector general equilibrium model with input-output linkages and characterise the general equilibrium response of trade flows, welfare and emissions. As far as we know, this is the first quantitative trade model that jointly endogenises the Emission Trading Scheme (ETS) allowances and CBAM prices. We find that the CBAM increases by 0.005\% the EU Gross National Expenditure (GNE), while trade shifts towards domestic cleaner production. Notably, emissions embodied in EU imports fall by 3\%, which is the result of a direct effect (-4.8\%) and a supply chain's upstream substitution effect (+1.8\%). The latter is a dampening effect that we can detect only by explicitly incorporating the production network. In contrast, extra-EU countries experience a slight decline in GNE (0.009\%) and emissions (0.11\%).