Discussion on the Dynamic Implications of EU Carbon Border Adjustment Mechanism

Talk by Ebru Voyvoda (Middle East Technical University – Ankara) as part of the Research Seminar Series of the IOS Economics Department.

The European Commission announced its comprehensive guide to achieve European Union’s (EU) transition to net zero by 2050, the European Green Deal (EGD) in 2019. The Carbon Border Adjustment Mechanism (CBAM), the proposed mechanism that would impose a (carbon) price on the imports from the trade partners into the EU, has been a critical component of this long-term development strategy as outlined in the EGD. From the EU Commission’s proposal of the CBAM text in July 2021, until the establishment and announcement of the of the final regulations in May 2023, design, implementation and possible repercussions of the CBAM, both the EU and its trade partners have been the subjects of an extensive research agenda. A principal part of the vast research on CBAM, starts from the current trade relations (exports of CBAM products to the EU), the input-output linkages in production and the emissions intensities to provide insights on the possible exposure of different regions/countries to the EU-CBAM and potential trade and welfare implications of the mechanism to the EU and its trade partners. Still, designed to address the issue of possible `carbon leakage` under the ambitious climate goals of the EU, the CBAM aims to commence a global stimulus of climate policy making and encourage cleaner production (also) in the non-EU countries. Hence, explicit motivation and prospect of the CBAM is that the announcement of the mechanism will induce expectations-driven, forward-looking behavior and lead to dynamic reactions. We aim to contribute to the discussions on the dynamic impacts of the EU-CBAM by developing a quantitative exploration, via a calibrated general equilibrium model. On the one hand, because the implementation of the CBAM is dynamic and also implies medium-to-long term implications, it is important to incorporate a longer-term structure. Yet, because the CBAM is likely to induce expectations of the future impacts and the decision makers in different regions will be taking this into account, our model is also designed to capture the inter-temporal reallocation effects by forward-looking agents, on the other. The modeling framework we develop is a multi-period decentralized intertemporal, multi-region (we represent global economy via 8 regions), and multi-sector (we distinguish 29 sectors, explicitly characterizing the energy production, input-output linkages and direct and indirect sectoral emissions) set-up to analyze the dynamic implications of the EU-CBAM.