Reassessing global trade and welfare impacts of EU’s carbon border adjustment mechanism in developing countries: a structural quantitative model

The European Carbon Border Adjustment Mechanism (CBAM) has been agreed on since 2023, while the discussions, especially in developing members that have higher carbon intensity, are still underway. Here, we used a structural quantitative trade model to analyze how the EU CBAM affects the shifts of global trade and welfare along a progression of sector coverage, carbon price and free allowances, through uncovering the interactions with the cost, total quantity and the share of interregional trade. Global trade-related data that cover bilateral trade from the BACI database, tariffs from the WITS database and EU Commission, and World Input-Output Table from Asian Development Bank are collected and aggregated into 54 regions and 35 industries. The CBAM interactions showed a significant impact on the export of BRICS in terms of their steel, fertilizer and cement products and of China’s aluminum product, and of developed countries of Japan and South Korea; this is, it deteriorates trade terms of developing countries. Top five countries with higher carbon tariffs are India (820 million US$), Russia (796 million US$), China (337 million US$), Turkey (163 million US$) and the United States (125 million US$) under 85$/tCO 2 eq carbon tax scenario, and the tariffs would be three-folds under the 250$/tCO 2 eq scenario. Welfare loss is relatively limited among countries in the BAU scenario, while become significant when the EU enlarges its sectoral coverage and carbon price of the CBAM. The re-assessment with published data and the agreement may help developing countries to suggest action priorities and achieve low carbon development.