Estimating the embodied carbon emissions and economic impacts of the EU carbon border adjustment mechanism and China's retaliatory measures

Abstract

The European Union's Carbon Border Adjustment Mechanism (CBAM) aims to prevent carbon leakage by imposing tariffs on imports of carbon-intensive products. While previous studies have analyzed CBAM's effects using computable general equilibrium (CGE) models, they have primarily focused on direct emissions or emissions related to electricity consumption. Few have comprehensively accounted for upstream indirect emissions or explored the potential economic impacts of retaliatory tariffs by affected countries. This study addresses these gaps by estimating the embodied carbon emissions associated with exports to the EU, including Scope 1, Scope 2, and indirect emissions excluding electricity, using a multi-regional input-output (MRIO) framework based on the GTAP database. A global CGE model is then employed to simulate the economic impacts of CBAM under various carbon price scenarios and to assess the effects of possible retaliatory tariffs by China. The results reveal that while CBAM effectively reduces carbon leakage, it imposes substantial economic burdens on exporting countries, particularly when indirect emissions are fully considered. Retaliatory tariffs by China further exacerbate these economic impacts, highlighting the risk of trade conflicts. These findings suggest that policymakers should design CBAM in a manner that accounts for embodied emissions while also considering cooperative mechanisms to mitigate potential trade tensions and ensure a fair and effective global climate policy framework.