How does China respond to the Carbon Border Adjustment Mechanism? An approach of global trade analysis

Abstract

The Carbon Border Adjustment Mechanism (CBAM) has sparked widespread debate recently. As a major trading partner of the European Union, China may be significantly affected by CBAM. Therefore, evaluating the impacts of CBAM and formulating corresponding solutions is significant for China to meet its emission reduction targets and sustain economic growth. Based on the computable general equilibrium framework, we evaluate the environmental and economic consequences of CBAM from a global trade perspective, with a particular focus on its impact on China. Furthermore, we explore a potential response policy by considering whether the adverse impacts of CBAM can be offset through enhanced international cooperation and exchange in low-carbon technologies. The findings reveal that although CBAM may partially curtail international carbon leakage, its contribution to worldwide emission reductions is limited. Specifically, the CBAM's effect on China is disproportionate, resulting in a welfare cost of 231 million USD for a mere 4.39 Mt emissions reduction. In contrast, the dissemination of innovative technologies through Sino-European climate partnerships could foster a more mutually beneficial outcome. It is the critical importance of climate fairness and reciprocity in the formulation of future climate policies, and unilateral approaches to global climate governance may not deliver the intended results.