Evaluating the EU Carbon Border Adjustment Mechanism with a Quantitative Trade Model

Noemi Walczak, Kenan Huremovi\'c and Armando Rungi

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Abstract: We analyze the economic and environmental impacts of the European Carbon Border Adjustment Mechanism (CBAM) using a multi-country, multi-sector general equilibrium model with input-output linkages. We quantify the general equilibrium responses of trade flows, welfare, and emissions. To our knowledge, we developed the first quantitative trade model that jointly endogenizes both the Emissions Trading System (ETS) allowance and the CBAM prices. We find that CBAM marginally increases EU Gross National Expenditure (GNE) and shifts trade toward more domestic and cleaner production. Emissions embodied in direct EU imports fall by 4.8%, and by 3% when including indirect emissions -- underscoring the importance of accounting for production networks in evaluating policy outcomes.

Date: 2025-06, Revised 2025-08
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