A European Union carbon border adjustment mechanism: implications for developing countries

As part of a plan to decarbonize its economy by 2050, the European Union is considering the introduction of a carbon border adjustment mechanism (CBAM), to reduce the risk of carbon leakage and to level the field for European industries working towards decarbonization of their production processes. Using a general equilibrium model, this study looks at the potential effects of a CBAM on international trade, carbon dioxide (CO2) emissions, income and employment, with a special focus on developing and vulnerable countries. The study confirms that the introduction of carbon pricing coupled with a CBAM helps reduce CO2 emissions, inside and outside the European Union. International trade patterns change in favour of countries where production is relatively carbon efficient. However, the reduction represents only a small percentage of global CO2 emissions.