The impact of collective implementation of carbon border adjustments on the economy and greenhouse gas emissions: A general equilibrium approach

Abstract

This study explores the impact of carbon border adjustment mechanism (CBAM) on the global economy and greenhouse gas (GHG) emissions. Specifically, it examines the consequences of implementing CBAM collectively among a selected group of Annex I countries. The analysis considers the prerequisite for countries to prioritize the reduction of GHG emissions before adopting CBAM measures. Employing an applied general equilibrium model with GTAP 10 data, the study explores different scenarios to assess potential outcomes of major economies adopting CBAM. The findings demonstrate that a group-oriented CBAM has the capacity to significantly reduce GHG emissions. However, it also reveals substantial negative economic implications for developing countries as they encounter unfavorable terms of trade. In contrast, the impact on developed countries is relatively limited owing to risk diversification within the inner group nations.