Rising inequality in the European Union under stringent climate policy: Internal challenges of carbon border adjustment mechanism

Ensuring an equitable transition to a green economy stands as a cornerstone of the EU's long-term growth objectives. Consequently, it is essential to thoroughly examine the impact of the Carbon Border Adjustment Mechanism (CBAM) on equality within the EU. Our research employs an extended input-output method to assess CBAM's impacts on industry output across EU nations, revealing three pivotal insights. (1) Significant differences in output changes among EU nations are evident. In long-term scenarios, industry output growth tends to favor highly developed industrialized countries over newer member states. (2) The Gini and Theil indices suggest that while CBAM policies may initially reduce economic inequality between EU countries, over time, they might contribute to its escalation. (3) Countries with a stronger pro-European stance tend to benefit more, unless the EU average carbon intensity is used. Such unequal outcomes of CBAM risk fueling discontent within the EU. To ensure both the effectiveness and equity of CBAM, several crucial measures must be undertaken. These include extending transition periods, meticulously selecting industries for inclusion, and considering exemptions for developing countries. Only through such concerted efforts can CBAM fulfill its dual mandate of environmental stewardship and equitable economic progress.