The global effects of carbon border adjustment mechanisms

Kimberly Clausing, Jonathan Colmer, Allan Hsiao and Catherine Wolfram

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Climate change poses a collective action problem: individual countries bear the costs of carbon regulation, while the benefits are shared globally. Carbon border adjustment mechanisms (CBAMs), which are currently being implemented by the EU and UK, aim to realign incentives by improving domestic competitiveness, reducing emissions leakage, and encouraging other countries to tax carbon. However, policy discussions also note that CBAMs could unfairly disadvantage lower-income trading partners. We evaluate these issues with a quantitative trade model and plant-level data for two key industries - steel and aluminum - which are the focus of early CBAM implementation. Together, they account for 14% of global emissions. We show that CBAMs can facilitate collective climate action, while largely avoiding disproportionate burdens on lower-income countries.

Keywords: carbon border adjustment mechanisms; emissions leakage; domestic competitiveness; policy spillovers; lower-income countries (search for similar items in EconPapers)
Date: 2025-05-02
New Economics Papers: this item is included in nep-ene and nep-env
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Working Paper: The Global Effects of Carbon Border Adjustment Mechanisms (2025)
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