The Global Effects of Carbon Border Adjustment Mechanisms

We study carbon border adjustment mechanism (CBAM) policies, as currently being implemented by the EU and UK. Policy discussions have cited three motivations and one concern. CBAMs can improve domestic competitiveness in regulated markets, reduce emissions leakage to unregulated markets, and encourage other countries to tax carbon. But CBAMs may particularly disadvantage lower-income trading partners. We evaluate these forces with a quantitative equilibrium model and plant-level data on aluminum and steel production worldwide. Our data cover the most emissions-intensive and heavily traded sectors targeted in the first phase of EU and UK implementation. We find that CBAMs can effectively boost competitiveness, curb leakage, and encourage regulation, while also avoiding disproportionate impacts on lower-income countries.