Beggar Thy Neighbor? On the Competitiveness and Welfare Impacts of the EU’s Proposed Carbon Border Adjustment Mechanism

35 Pages Posted: 24 Jul 2021 Last revised: 30 Aug 2021

See all articles by Jiarui Zhong

Jiarui Zhong

Martin-Luther-University Halle-Wittenberg

Jiansuo Pei

Renmin University of China - School of Applied Economics

Date Written: July 22, 2021

Abstract

Curbing climate change is gaining increasing consensus globally. While many countries seek to set carbon prices, significant price dispersion and policy stringency continue to raise concerns about competitiveness. To address this issue, the EU has proposed a carbon border adjustment mechanism (CBAM), which aims to level the playing field by levying a carbon price on EU imports. Theoretically, this mechanism would reduce the competitiveness of developing countries' exports and, therefore, shift the environmental burden from developed regions to the emerging world. In this paper, we estimate the competitiveness and welfare impacts of the EU CBAM, based on the so-called multi-regional input-output approach. We quantify changes in the value of exports to the EU market upon CBAM implementation for both EU members and non-EU countries, plus the rest of the world. It is found that the EU CBAM will lead to a redistribution of competitiveness among countries and regions, while the effect is seen to be more pronounced in emissions-intensive and trade-intensive sectors. Moreover, a deeper sub-national-level analysis on China shows that, given its pervasive domestic production network, income losses in landlocked provinces exceed their export losses, contrasting with the pattern for trade-exposed provinces.

Keywords: EU CBAM, climate policy, competitiveness, carbon leakage, Input-Output approach

JEL Classification: C67, F18, F64, Q56, Q58

Suggested Citation

Zhong, Jiarui and Pei, Jiansuo, Beggar Thy Neighbor? On the Competitiveness and Welfare Impacts of the EU’s Proposed Carbon Border Adjustment Mechanism (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3891356 or http://dx.doi.org/10.2139/ssrn.3891356

Jiarui Zhong

Martin-Luther-University Halle-Wittenberg ( email )

Germany

Jiansuo Pei (Contact Author)

Renmin University of China - School of Applied Economics ( email )

59 Zhongguancun Street
Haidian District
Beijing, +861082500208 100872
China

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