Could the EU carbon border adjustment mechanism promote climate mitigation? An economy-wide analysis

Abstract

Due to concerns about carbon leakage and sectoral competitiveness, the European Union (EU) proposed implementing the carbon border adjustment mechanism (CBAM). The effectiveness and potential negative consequences of CBAM have aroused extensive discussion. From the perspective of the economy-wide analysis, this study uses a global computable general equilibrium model to explore the rationality of CBAM from the aspects of socioeconomic impact and the effects of promoting climate mitigation. Furthermore, the potential alternative mechanism of CBAM is proposed. The results show that CBAM can reduce the EU's gross domestic product (GDP) loss; however, the GDP loss in all other regions increases. Moreover, CBAM raises household welfare losses in most regions, including the EU. Second, although CBAM can reduce the marginal abatement cost in eight regions, it comes at the cost of greater economic losses. Furthermore, the economic and household welfare cost of raising emissions reduction targets in regions like the USA and Japan is substantially higher than the impact of passively accepting the CBAM; therefore, CBAM's ability to drive ambitious emission reduction initiatives may be limited. Finally, for the potential alternative mechanism, from the perspective of reducing economic cost and household welfare losses, the EU could implement domestic tax cuts in the short-term and promote global unified carbon pricing in the long-term.