Short-term socio-economic impacts of EU carbon border adjustment mechanism (CBAM) on EU countries and their trade partners under different revenue redistribution schemes

To align with the “Fit for 55” policy package, the EU plans to gradually phase out free allowances in its ETS and introduce a CBAM to avoid carbon leakages. This study investigates the socio-economic impacts of the EU ETS and CBAM on EU member states and their trade partners using a price-endogenized MRIO model. The analysis covers sectoral gross output, GDP, and employment, utilizing EXIOBASE 3rx dataset, which provides extensive regional and sectoral coverage, encompassing 150 countries and 70 sectors. The effects simulated in this price MRIO model are changes in final demand resulting from revenue recycling, substitution of production inputs, and trade substitution. In the absence of the CBAM, imposing a carbon price at the current ETS rate of 95 EUR/CO2e is projected to employment losses ranging from 266,000 to 363,000 jobs in the EU and a reduction in production by 0.63% to 0.68%. Implementing CBAM with scope 2 coverage is anticipated to mitigate these adverse effects, yielding a net gain of 159,000 jobs and a 0.18% of GDP. However, the CBAM is expected to negatively impact the EU trade partners. China is projected to experience the largest absolute GDP loss, amounting to 3 billion EUR (-0.03%), while Russia and Ukraine1 are likely to suffer the largest relative GDP losses, both at -0.20%. In terms of employment, the impact in India is estimated at a loss of 64,000 jobs, surpassing the 51,000 job losses anticipated in China. Despite its potential to alleviate some negative impacts through revenue redistribution, the efficacy of the CBAM in fully addressing these challenges is limited. The formation of climate clubs, where countries can generate more revenue and exercise greater sovereignty over its use, is posited as a more effective alternative to avoid retaliations due to stringent climate policies.