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The EU-India Free Trade Agreement: Ex-Ante Trade, CO2 Emission, and Welfare Effects under the Carbon Border Adjustment Mechanism

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  • Gero Dasbach

    (University of Lille, France)

Abstract

Gains from trade liberalization are accompanied by environmental externalities of increased greenhouse gas emissions. The EU is currently active on both trade and climate policy frontiers. By means of a new quantitative trade model, this study uncovers counterfactual changes in trade, CO2 emissions, and welfare of an EU-India FTA, first as a standalone policy, and then, in conjunction with the Carbon Border Adjustment Mechanism (CBAM). Trade data from the OECD Inter-Country Input-Output (ICIO) tables and CO2 emission data from the OECD Trade in Embodied CO2 (TECO2) database are used. While the CBAM decreases trade volumes and CO2 emissions, a hypothetical EU-India FTA results in significant increases in both trade and CO2 emissions. When considering the Armington assumption of national product differentiation and no intermediate goods, the welfare effects of the EU-India FTA alone are found to be negative for India.

Suggested Citation

  • Gero Dasbach, 2024. "The EU-India Free Trade Agreement: Ex-Ante Trade, CO2 Emission, and Welfare Effects under the Carbon Border Adjustment Mechanism," EGEIWP 03-2024, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised May 2024.
    • Handle: RePEc:bai:egeiwp:egei_wp-3_2024
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    References listed on IDEAS

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    1. Norihiko Yamano & Joaquim Guilhoto, 2020. "CO2 emissions embodied in international trade and domestic final demand: Methodology and results using the OECD Inter-Country Input-Output Database," OECD Science, Technology and Industry Working Papers 2020/11, OECD Publishing.
    2. Dai, Mian & Yotov, Yoto V. & Zylkin, Thomas, 2014. "On the trade-diversion effects of free trade agreements," Economics Letters, Elsevier, vol. 122(2), pages 321-325.
    3. Gaulier, Guillaume & Zignago, Soledad, 2004. "Notes on BACI (analytical database of international trade). 1989-2002 version," MPRA Paper 32401, University Library of Munich, Germany.
    4. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 511-540, July.
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