The Network Effects of the EU Carbon Border Adjustment Mechanism with a Quantitative Trade Model

TL;DR

This paper models the economic and environmental impacts of the EU's Carbon Border Adjustment Mechanism (CBAM) using a comprehensive trade model, revealing significant emission reductions and supply chain effects.

Contribution

It is the first to endogenize both carbon prices and CBAM prices within a multi-sector general equilibrium trade model.

Findings

CBAM could reduce EU import embodied emissions by 5.19%

Global supply chain adjustments could increase emission reductions to 8.84%

CBAM slightly increases EU GNE and shifts sourcing toward cleaner inputs

Abstract

We investigate the economic and environmental impacts of the European Carbon Border Adjustment Mechanism (CBAM) using a multi-country, multi-sector general equilibrium model with input-output linkages. We quantify the general equilibrium responses of trade flows, expenditures, and emissions. To our knowledge, we are the first to endogenize both carbon prices and the CBAM price. We find that, once fully implemented, CBAM could reduce carbon emissions embodied in EU imports by 5.19%. In the absence of global production network adjustments, this reduction would be larger (8.84%), highlighting the substitution effects along global supply chains. At the same time, CBAM slightly increases EU Gross National Expenditure (GNE) through terms-of-trade effects and induces a reallocation of sourcing toward domestic and relatively cleaner inputs. For non-EU countries, the aggregate effects are modest: GNE declines by 0.02%, and emissions fall by 0.11%. Overall, our results underscore the importance of accounting for global supply chains when evaluating border carbon policies. We conclude that policies targeting supply-chain emissions are essential for capturing the full carbon footprint of production.