Winners and losers of the EU carbon border adjustment mechanism. An intra-EU issue?

Abstract

The paper develops a Multi-Regional Input–Output analytical framework to study the EU’s recently adopted carbon border adjustment mechanism (CBAM). This policy introduces carbon tariffs to replace free allowances in several Emission Trading System (ETS) industries to reinforce and extend the EU carbon price signal while mitigating the risk of carbon leakage. Yet, the policy has prompted immediate international equity concerns, particularly regarding its potential burden-shifting effect, especially on low-income countries. In this context, the analysis provides a comprehensive examination of the distributional impacts of the EU CBAM, shedding light on the countries and industries most affected by the policy. Contrary to the apprehensions, the findings indicate limited evidence of burden shifting, with such a phenomenon being confined to a few specific geographical areas and industries. Instead, the results unveil more pronounced redistributive impacts within the EU, with certain Eastern EU countries facing particular losses from replacing free allowances with CBAM. Adverse competitiveness effects and carbon leakage in various downstream industries are also identified.