Cost‐Benefit Analysis of the European Union Carbon Border Adjustment Mechanism in Fertilizer Trade

ABSTRACT The carbon border adjustment mechanism (CBAM), launching 2026, will charge EU importers for embedded carbon emissions, aiming to reduce emissions but raising import costs. Shifts in demand following implementation may reduce carbon emissions, but importers will bear the cost of increased prices. This study examines and weighs the economic costs and environmental benefits of the CBAM in a fertilizer sector‐specific policy analysis, testing whether the reduction of imported carbon emissions justifies the cost to EU consumers. To evaluate this trade‐off, EU import demand is modeled and analyzed before and after CBAM credits are included in the import price. Economic costs are evaluated through a welfare analysis calculating the decline in surplus due to reduced imports. Environmental benefits are calculated by determining the decreases in fertilizer demand, valued at the social cost of carbon (SCC) to compare directly with economic costs. The baseline scenario results show that the cost of the CBAM, equal to $4.04 billion, outweighs the benefit, equal to $2.58 billion, by $1.46 billion annually, when using a CBAM credit cost of $73.5 per metric ton CO 2 and a SCC value of $254 per metric ton CO 2 . However, sensitivity analysis reveals that the CBAM benefit outweighs the cost when CBAM credits cost $91.8 per metric ton CO 2 or the SCC is valued at $700 per metric ton CO 2 . This study helps relevant stakeholders, as trade partners examine strategies and EU agribusiness prepares for increasing input prices. In light of new EU agricultural goals aimed at reducing synthetic fertilizers, the CBAM's impact on demand for fertilizer imports could provide an opportunity for organic fertilizers as a substitute given policy support.