Global emissions and international trade: Quantifying the impact of carbon border adjustments

Abstract

We extend the quantitative trade model of Caliendo and Parro (2015) by incorporating endogenous carbon emissions and carbon pricing. Our novel approach uses per-dollar carbon intensity to translate actual carbon prices per tonne into an ad valorem tariff rate for analysis, avoiding the common practice of estimating implicit carbon prices in most quantitative trade models. By using the hat-algebra approach, the model can perform counterfactuals without needing trade cost structures, productivity, and per unit emission intensities. We evaluate the EU Carbon Border Adjustment Mechanism (CBAM) and its economic and environmental impacts. The simulation shows that the EU CBAM reduces global emissions and production in non-EU countries, and boosts EU production and competitiveness, resulting in a 0.38% reduction in global emissions at a real income loss of 0.01%.