Cross-border risks of industrial decarbonization: Carbon tariffs exacerbate carbon inequity in international trade

Abstract

Policies targeting cross-border industrial decarbonization, such as carbon tariffs, may risk exacerbating the structural inequity between countries/regions regarding climate responsibility and economic benefits. As a typical representative, the EU's Carbon Border Adjustment Mechanism (CBAM) is introduced to combat carbon leakage and promote global industrial decarbonization. However, the implications of CBAM on trade-related carbon inequity remain underexplored. Using international trade data of the primary CBAM-targeted sectors (cement, fertilizers, iron and steel, and aluminum), we apply the Carbon Gini coefficient and the Trade Carbon Inequity (TCI) index to assess the effects of carbon tariffs with various revenue recycling mechanisms on trade-related carbon inequities at both global and national/regional levels. The results reveal that implementing CBAM, without revenue recycling, significantly intensifies carbon inequity, as indicated by increased Carbon Gini coefficients and higher percentage increases in developing economies’ TCI indices. Moreover, revenue recycling—whether based on national/regional historical climate damage or per-capita income—partially mitigates these effects, yet carbon inequities remain above the pre-CBAM baselines. In contrast, our proposed TCI-based allocation criterion reduces the Carbon Gini coefficients below pre-CBAM levels and offsets CBAM-related TCI increases in developing economies such as Turkey and India. These findings emphasize that CBAM design needs to integrate justice-oriented revenue recycling to harmonize decarbonization efforts with equity goals in pursuing a globally carbon-neutral economy while reconciling Sustainable Development Goals—specifically, “SDG13-Climate Action” and “SDG10-Reduced Inequalities.”