Expanding carbon pricing boundaries and the EU CBAM: insights into China and India

Speaker: 
Paola Rocchi, CMCC

Moderator: 
Valentina Bosetti, CMCC 

Abstract:
Implemented alongside the EU Emissions Trading System revision, the Carbon Border Adjustment Mechanism (CBAM) requires importers of selected energy-intensive commodities to purchase certificates reflecting the EU carbon price. Aimed to mitigate carbon leakage and promote cleaner industrial practices outside the EU, CBAM has sparked heated academic and political debates, and appears to play a role in accelerating the development of domestic emissions control policies in non-EU countries. This paper has two objectives. First, it provides an ex-ante evaluation of CBAM by assessing its macroeconomic and environmental impacts within the scope and timeframe of the approved legislative text. Second, it examines CBAM alongside alternative domestic measures that could exempt non-EU countries from CBAM, focusing on China and India, major CO2 emitters and EU exporters. Using the FIDELIO general equilibrium model, we evaluate the effects of CBAM and potential Chinese and Indian policies on international trade, production, and environmental outcomes. Our findings suggest that CBAM’s overall macroeconomic and environmental impacts may be negligible under current legislation. However, the policy significantly affects production and trade in highly energy-intensive sectors. When integrated into a framework of stringent international carbon control policies, CBAM’s impact on international trade flows is less pronounced, with notable regional disparities.