An Impact Assessment of the European Carbon Border Adjustment Mechanism (CBAM) on the Korean Economy: A CGE Approach

Purpose - This paper investigates the economic impact of the European Union Carbon Border Adjustment Mechanism (EU-CBAM) on Korea’s economy. Design/Methodology/Approach - The study employs the input-output model and Global Trade Analysis Project-Energy (GTAP-E) model by McDougal and Golub (2007), along with the GTAP-E version 10.1 Data Base developed by Aguiar et al. (2019). The input-output model estimates the carbon emissions of Korea’s exports to the EU27, evaluating potential carbon costs and a carbon tax (measured in US dollars per ton of emissions). Utilizing the static GTAP-E model, three policy scenarios are implemented, focusing on direct carbon emissions (Scope 1), emissions from electricity usage (Scope 2), and indirect emissions (Scope 3). Findings - Simulation outcomes reveal significant contractions in CBAM-related sectors of the Korean economy, with a decline in iron and steel production (US$ 68.00 million) and electronic industries (US$ 39.16 million). Korea’s export reductions to the EU27 in CBAM-affected sectors (iron and steel, cement, aluminum) indicate a subtle impact extending to the energy, energy-intensive, and services sectors. Research Implications - This paper provides valuable insights to policymakers and entrepreneurs in navigating the challenges and opportunities arising from the interlinkage of environmental policies and global trade dynamism. The analysis contributes to discerning perspectives essential for informed decision-making amid the complex interplay of regulatory frameworks and international trade dynamics.