Default emissions values, verification costs and strategic abatement under the EU Carbon Border Adjustment Mechanism

The European Union’s Carbon Border Adjustment Mechanism (CBAM) allows covered imports to be assessed using verified actual emissions or regulatory defaults. This paper examines how the choice of emissions basis influences exporters’ verification, abatement and production decisions under strategic competition. We develop a two-stage Cournot model in which heterogeneous exporters decide whether to verify their emissions and to undertake abatement before competing on quantities. The model incorporates verification costs, free-allocation adjustments, non-negative certificate liability and the incidence of CBAM costs. The analysis shows that higher default values can strengthen verification incentives, while declining free allocation can reduce abatement among verified exporters under certain conditions. Consequently, tighter CBAM treatment may increase emissions associated with modelled EU-bound output, although this outcome depends on abatement-cost structure and becomes more restrictive as output-scaled costs become more important. A steel application combines regulatory parameters with a deterministic sensitivity analysis to identify the regions of parameter space associated with different equilibrium outcomes. The results also show that equilibrium multiplicity and mixed strategies can affect emissions and welfare comparisons. Overall, the findings highlight how default values, verification costs, cost incidence and abatement technology interact to shape exporters’ responses to CBAM.