The EU Carbon Border Adjustment Mechanism (CBAM) is now in its transitional phase and will fully enter into force from 1 January 2026. We assess the impacts of such tariffs on CO2-intensive imports on welfare, income and emissions, employing a general equilibrium framework. For the EU, we find an increase in the terms of trade and consequently small positive welfare effects, whereas there are tiny negative effects on real wages. Although global CO2 emissions have been reduced, specialisation effects have led to a slight increase in emissions in the EU.
Introduction
The EU Carbon Border Adjustment Mechanism (CBAM), which is now in its transitional phase, aims to establish a comparable carbon pricing level between goods of different origins, regardless of whether production takes place inside or outside the EU. The CBAM has two main goals. The first is to reduce the risk of carbon leakage, i.e. the relocation of production facilities to non-EU countries with less stringent climate regulations. The second is to create an incentive for producers in non-EU countries to reduce emissions in the manufacturing process. The CBAM has been applied since 1 October 2023; its transitional phase spans the period to the end of 2025. It should be fully implemented from 1 January 2026. The first reporting period ended on 31 January 2024. From 1 January 2025, each importer or their representative is obliged to apply for authorisation as a CBAM declarant before importing CBAM goods. In the first phase of the CBAM, the sectors covered are cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. From 2026, CBAM certificates must be purchased when importing certain goods whose production in third countries has resulted in greenhouse gas (GHG) emissions. The quantity of CBAM certificates to be purchased depends on the quantity of GHG emissions generated during production; the price of CBAM certificates is based on the price of EU emissions trading system (ETS) certificates at the time the goods are imported. The costs imposed by CBAM on imports therefore correspond to those that would have been incurred by the emission of GHGs and the associated purchase of EU ETS allowances in the case of production within the EU.
From an economic modelling point of view, the CBAM constitutes a tariff on imports in certain industries, focusing on CO2 emissions. In Flórez Mendoza et al. (2024), we assess the implications of such tariffs, employing a general equilibrium model following the approach of Caliendo and Parro (2015), using novel data OECD-ICIO 2023 multi-country input-output tables, which provide data for 76 countries and 45 industries combined with information on CO2 emissions at the same industry classification for the most recent available year (2020).
Welfare effects of the EU CBAM
The tariffs depend on the price of the EU ETS certificates, which we assume to be EUR 100 for CO2 emissions in our base scenario. Of the 45 industries in our data, nine are affected by such tariffs. The most important are energy (NACE D), petroleum (NACE C19), minerals (NACE C23) and metals (NACE C24), with tariff equivalents up to 10%, assuming a carbon price of EUR 100.
The economic implications of such tariffs imposed by the EU and EFTA countries are presented in Figure 1. First, the terms of trade are improving for the EU as the products are inelastically supplied and hence EU import prices net of tariffs are decreasing, whereas export prices are rising. Consequently, the EU experiences an increase in welfare, which according to the model amounts to 0.016% in the base scenario of a carbon price of EUR 100, whereas terms of trade and welfare decline by 0.005% in the other countries. Global welfare hence declines only marginally. Owing to overall lower demand, real wages decline in all country groups, but most strongly in the EU (by 0.025%). As shown in Figure 1, the higher the underlying carbon price, the larger these effects are.
Effects on global CO2 emissions
The change in CO2 emissions in this framework is solely driven by changes in specialisation patterns. Because of the tariffs, EU specialisation in CO2-intensive industries increases, and thus CO2 emissions rise by 0.72% in the EU in the base scenario of a carbon price of EUR 100, as indicated in Figure 2. The opposite occurs for the other countries, in which CO2 emissions decline by 0.143%. The global effect is ambiguous, depending on overall CO2 intensities in both country groups. However, as production in EU countries is in general less CO2-intensive than in the other countries and as production of CO2-intensive industries shifts towards the EU, global CO2 emissions are reduced by 0.08%. The higher the carbon price, the stronger the specialisation effects towards the EU, and therefore CO2 emissions in the EU increase more strongly and consequently decline more strongly globally (see Figure 2).
Conclusions
These results first indicate a small positive environmental impact at the global level, as the introduction of the EU CBAM reduces overall CO2 emissions by reducing production of goods in countries with high CO2 intensities and increasing production in countries with low CO2 intensities. The effect on global emissions is, however, relatively small. Second, our simulations show that welfare is increasing in those countries that are participating in the CBAM (EU and EFTA countries). Conversely, the other countries see their welfare decrease. As with the findings for CO2 emissions, the magnitude of these changes is relatively small. Third, the higher the underlying carbon price, the greater the impacts on all variables presented. Again, this is to be expected as a higher carbon price implies a higher applied tariff rate.
The CBAM, however, leads to an increase of CO2 emissions in the EU, owing to the resulting specialisation effects. It should be emphasised that this approach does not consider the effect that higher import costs (and eventually rising CO2 prices) are incentives for firms to use less CO2-intensive technologies. On top of that, sector-specific strategies within the EU’s broader climate policy framework could enhance such a technological shift (see Draghi, 2024, Chapter 3). Policy makers should focus on high-emitting sectors, such as energy and heavy industry, and provide incentives for climate-friendly technologies. Meanwhile, lower-emitting industries could benefit from policies that maintain progress and encourage further green innovation. Such an approach aligns with the EU’s climate agenda and ensures an effective transition to a low-carbon economy while strengthening the EU’s competitive position.
References:
Caliendo, L. & F. Parro (2015), Estimates of the trade and welfare effects of NAFTA, The Review of Economic Studies, Vol. 82(1), pp. 1-44.
Draghi, M. (2024), The future of European competitiveness – Part A: A competitiveness strategy for Europe, European Commission.
Flórez Mendoza, J., O. Reiter & R. Stehrer (2024), EU carbon border tax: General equilibrium effects on income and emissions, wiiw Working Paper, The Vienna Institute for International Economic Studies (wiiw), forthcoming.
Korpar, N., M. Larch & R. Stöllinger (2023), The European carbon border adjustment mechanism: a small step in the right direction, International Economics and Economic Policy, Vol. 20(1), pp. 95-138.
Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.
Javier Flórez Mendoza is an economist at the Vienna Institute for International Economic Studies (wiiw). His research focuses on international trade, trade policy, European integration, environmental economics and regional economics. He is a PhD candidate at the Vienna University of Economics and Business.
The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and a PhD candidate at the Leopold-Franzens University Innsbruck.