CBAM! – Assessing potential costs of the EU carbon border adjustment mechanism for emerging economies

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Title: CBAM! – Assessing potential costs of the EU carbon border adjustment mechanism for emerging economies
Author: Simola, Heli
Organization: Bank of Finland
Department / Unit: Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Policy Brief
Series number: 10/2021
Year of publication: 2021
Publication date: 25.10.2021
Pages: 27
Subject (yso): ilmastopolitiikka; päästöt; tavoitteet; päästökauppa; EU-maat; tuonti; ulkomaankauppa; kustannukset
Keywords: Bofit-kokoelma; kehittyvät markkinat
Other keywords: carbon border adjustment mechanism; climate policy; international trade; emerging economies
Abstract: With the EU adopting more ambitious emission reduction targets this year, the European Commission in July published a proposal on measures for adjusting EU climate policy. Measures include a carbon border adjustment mechanism (CBAM) that imposes a price on emissions embodied in products imported to the EU. In this policy note, we review the main lines of the CBAM proposal and discuss its potential economic effects on China, India, Russia, Turkey and Ukraine – the EU’s largest import sources for products subject to CBAM. We calculate illustrative estimates for the potential cost effectsof several specifications of the CBAM for these countries and compare them against earlier estimates. We also discuss the potential aggregate economic effects of the CBAM for these economies based on earlier literature. Despite considerable variation across countries and sectors, our analysis suggests that the aggregate economic effects of the CBAM would be limited for most exporting countries.
Table of contents: Abstract ...... 3 1. Introduction...... 4 2. The EU emission trading system..... 4 3. The current carbon border adjustment proposal ...... 6 4. Imports covered by the EU’s carbon border adjustment mechanism...... 7 5. Evaluating CBAM costs to emerging market exporters..... 8 5.1. Methodology ...... 8 5.2. Baseline estimates...... 9 6. Factors affecting the baseline estimates..... 10 6.1. Factors that lower CBAM costs...... 10 6.2. Factors that increase CBAM costs..... 12 7. Discussion on the aggregate economic effects for exporters ...... 14 8. Concluding remarks...... 15 References...... 16 Appendix 1. List of sectors deemed at risk for carbon leakage in the EU for 2021–2030 ..... 18 Appendix 2. Products covered by the CBAM in the European Commission’s July 2021 proposal.... 20 Appendix 3. Methodology for calculating CBAM cost estimates..... 21 Benchmark CBAM costs...... 21 CBAM costs with extension to indirect emissions...... 22 CBAM costs with extension to wider product coverage..... 23 Appendix 4. Comparison of various estima tes of CBAM costs..... 24

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