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The European carbon border adjustment mechanism: a small step in the right direction

Author

Listed:
  • Niko Korpar

    (The Vienna Institute for International Economic Studies (Wiiw))

  • Mario Larch

    (University of Bayreuth
    CEPII
    Ifo Institute
    CESifo)

  • Roman Stöllinger

    (The Vienna Institute for International Economic Studies (Wiiw)
    Vienna University of Economics and Business)

Abstract

We estimate the effects of a European Carbon Border Adjustment (CBA) mechanism on exports, real GDP, welfare and emissions using the multi-region, multi-sector structural gravity model of Larch and Wanner (2017). Incorporating the main industries covered in the proposal of the European Commission from mid-2021, as well as its other design features, and assuming prevailing CO2 prices, we find only small effects of the European CBA mechanism. EU exports are estimated to decline by 0.04%, while CO2 emissions in EU countries increase by 0.24%. These negligible results mask larger adjustments at the sectoral level. The structural changes will shift the EU economy towards more emission-intensive industries, which will make achieving its climate goals harder. On the positive side, the European CBA mechanism will reduce global emissions by 0.08%. Given the minute economic costs in terms of GDP and welfare losses, the CBA mechanism seems an appropriate policy tool, though its proposed design will not be able to make a significant contribution to mitigating global climate change.

Suggested Citation

  • Niko Korpar & Mario Larch & Roman Stöllinger, 2023. "The European carbon border adjustment mechanism: a small step in the right direction," International Economics and Economic Policy, Springer, vol. 20(1), pages 95-138, February.
    • Handle: RePEc:kap:iecepo:v:20:y:2023:i:1:d:10.1007_s10368-022-00550-9
    DOI: 10.1007/s10368-022-00550-9
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    More about this item

    Keywords

    Carbon border taxes; Carbon tariffs; Carbon leakage; Climate change;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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