The European Union's CBAM: Averting Emissions Leakage or Promoting the Diffusion of Carbon Pricing?

Michael A. Mehling, Geoffroy Dolphin and Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Adopted in 2023, the Carbon Border Adjustment Mechanism (CBAM) is a significant component of the European Union's ambitious decarbonization strategy under the European Green Deal. This working paper questions the CBAM's effectiveness in achieving its stated objective, prevention of carbon leakage, but proceeds to document its impactful role in accelerating the global diffusion of carbon pricing. Empirical evidence for carbon leakage remains sparse, and implementation challenges would limit the capacity of the CBAM to counteract leakage even where it occurs. Nonetheless, the CBAM has already demonstrated a powerful spillover effect by incentivizing the acceleration of carbon pricing roadmaps across EU trading partners, suggesting that trade-related climate measures can effectively encourage global climate action. As the EU navigates the complexities of operationalizing the CBAM, it must balance several tradeoffs to maintain this important spillover effect. If successful, the CBAM could catalyze a virtuous cycle of carbon pricing adoption, reinforcing its pivotal role in the EU's toolbox to manage the environment-trade nexus.

Keywords: CBAM; Carbon Pricing; Carbon Leakage; Environment-Trade Nexus; European Union (search for similar items in EconPapers)
JEL-codes: F42 H23 Q58 (search for similar items in EconPapers)
Date: 2024-10-07
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env, nep-eur, nep-int and nep-opm
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Working Paper: The European Union's CBAM: averting emissions leakage or promoting the diffusion of carbon pricing? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2459

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