The EU-India Free Trade Agreement: Ex-Ante Trade, CO2 Emission, and Welfare Effects under the Carbon Border Adjustment Mechanism

Gero Dasbach

No 03-2024, EGEIWP from Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro"

Abstract: Gains from trade liberalization are accompanied by environmental externalities of increased greenhouse gas emissions. The EU is currently active on both trade and climate policy frontiers. By means of a new quantitative trade model, this study uncovers counterfactual changes in trade, CO2 emissions, and welfare of an EU-India FTA, first as a standalone policy, and then, in conjunction with the Carbon Border Adjustment Mechanism (CBAM). Trade data from the OECD Inter-Country Input-Output (ICIO) tables and CO2 emission data from the OECD Trade in Embodied CO2 (TECO2) database are used. While the CBAM decreases trade volumes and CO2 emissions, a hypothetical EU-India FTA results in significant increases in both trade and CO2 emissions. When considering the Armington assumption of national product differentiation and no intermediate goods, the welfare effects of the EU-India FTA alone are found to be negative for India.

Date: 2024-04, Revised 2024-05
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