What Is a Carbon Tariff and Why Is the EU Imposing One?

Pierre Coster, Julian di Giovanni and Isabelle Méjean ()
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Isabelle Méjean: https://www.sciencespo.fr/department-economics/researcher/isabelle-mejean.html

No 20260107b, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The European Union has been an early adopter of carbon policies, with the introduction of the EU Emissions Trading System (ETS) in 2005. This scheme sets a common price for carbon and is applied to the most polluting manufacturing sectors. By increasing the cost of emissions-intensive production, the system incentivizes firms to decrease their use of fossil fuels. However, as we show in a companion post, the policy’s impact was moderated by firms increasing their reliance on high-emissions imports. To eliminate this workaround, the EU will expand the ETS to imports in 2026, through the Carbon Border Adjustment Mechanism (CBAM). The CBAM will essentially put a tariff on imported goods based on their carbon content. Our recent work provides a quantitative analysis of how the ETS and CBAM affect firms’ supply choice decisions, and the resulting changes in domestic prices and emissions.

Keywords: firm sourcing; supply chain adaptation; carbon tax; carbon tariffs; carbon leakage (search for similar items in EconPapers)
JEL-codes: F14 F18 F64 H23 Q56 (search for similar items in EconPapers)
Date: 2026-01-07
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DOI: 10.59576/lse.20260107b

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