The EU Carbon Border Adjustment Mechanism (CBAM) is now in its transitional phase and will fully enter into force from 1 January 2026. We assess the impacts of such tariffs on CO₂-intensive imports on welfare, income and emissions, employing a general equilibrium framework. For the EU, we find an increase in the terms of trade and consequently small positive welfare effects, whereas there are tiny negative effects on real wages. Although global CO₂ emissions have been reduced, specialisation effects have led to a slight increase in emissions in the EU.

Introduction

The EU Carbon Border Adjustment Mechanism (CBAM), which is now in its transitional phase, aims to establish a comparable carbon pricing level between goods of different origins, regardless of whether production takes place inside or outside the EU. The CBAM has two main goals. The first is to reduce the risk of carbon leakage, i.e. the relocation of production facilities to non-EU countries with less stringent climate regulations. The second is to create an incentive for producers in non-EU countries to reduce emissions in the manufacturing process. The CBAM has been applied since 1 October 2023; its transitional phase spans the period to the end of 2025. It should be fully implemented from 1 January 2026. The first reporting period ended on 31 January 2024. From 1 January 2025, each importer or their representative is obliged to apply for authorisation as a CBAM declarant before importing CBAM goods. In the first phase of the CBAM, the sectors covered are cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. From 2026, CBAM certificates must be purchased when importing certain goods whose production in third countries has resulted in greenhouse gas (GHG) emissions. The quantity of CBAM certificates to be purchased depends on the quantity of GHG emissions generated during production; the price of CBAM certificates is based on the price of EU emissions trading system (ETS) certificates at the time the goods are imported. The costs imposed by CBAM on imports therefore correspond to those that would have been incurred by the emission of GHGs and the associated purchase of EU ETS allowances in the case of production within the EU.

From an economic modelling point of view, the CBAM constitutes a tariff on imports in certain industries, focusing on CO₂ emissions. In Flórez Mendoza et al. (2024), we assess the implications of such tariffs, employing a general equilibrium model following the approach of Caliendo and Parro (2015), using novel data OECD-ICIO 2023 multi-country input-output tables, which provide data for 76 countries and 45 industries combined with information on CO₂ emissions at the same industry classification for the most recent available year (2020).

Welfare effects of the EU CBAM

The tariffs depend on the price of the EU ETS certificates, which we assume to be EUR 100 for CO₂ emissions in our base scenario. Of the 45 industries in our data, nine are affected by such tariffs. The most important are energy (NACE D), petroleum (NACE C19), minerals (NACE C23) and metals (NACE C24), with tariff equivalents up to 10%, assuming a carbon price of EUR 100.

The economic implications of such tariffs imposed by the EU and EFTA countries are presented in Figure 1. First, the terms of trade are improving for the EU as the products are inelastically supplied and hence EU import prices net of tariffs are decreasing, whereas export prices are rising. Consequently, the EU experiences an increase in welfare, which according to the model amounts to 0.016% in the base scenario of a carbon price of EUR 100, whereas terms of trade and welfare decline by 0.005% in the other countries. Global welfare hence declines only marginally. Owing to overall lower demand, real wages decline in all country groups, but most strongly in the EU (by 0.025%). As shown in Figure 1, the higher the underlying carbon price, the larger these effects are.

Effects on global CO₂ emissions

The change in CO₂ emissions in this framework is solely driven by changes in specialisation patterns. Because of the tariffs, EU specialisation in CO₂-intensive industries increases, and thus CO₂ emissions rise by 0.72% in the EU in the base scenario of a carbon price of EUR 100, as indicated in Figure 2. The opposite occurs for the other countries, in which CO₂ emissions decline by 0.143%. The global effect is ambiguous, depending on overall CO₂ intensities in both country groups. However, as production in EU countries is in general less CO₂-intensive than in the other countries and as production of CO₂-intensive industries shifts towards the EU, global CO₂ emissions are reduced by 0.08%. The higher the carbon price, the stronger the specialisation effects towards the EU, and therefore CO₂ emissions in the EU increase more strongly and consequently decline more strongly globally (see Figure 2).

Conclusions

These results first indicate a small positive environmental impact at the global level, as the introduction of the EU CBAM reduces overall CO₂ emissions by reducing production of goods in countries with high CO₂ intensities and increasing production in countries with low CO₂ intensities. The effect on global emissions is, however, relatively small. Second, our simulations show that welfare is increasing in those countries that are participating in the CBAM (EU and EFTA countries). Conversely, the other countries see their welfare decrease. As with the findings for CO₂ emissions, the magnitude of these changes is relatively small. Third, the higher the underlying carbon price, the greater the impacts on all variables presented. Again, this is to be expected as a higher carbon price implies a higher applied tariff rate.

The CBAM, however, leads to an increase of CO₂ emissions in the EU, owing to the resulting specialisation effects. It should be emphasised that this approach does not consider the effect that higher import costs (and eventually rising CO₂ prices) are incentives for firms to use less CO₂-intensive technologies. On top of that, sector-specific strategies within the EU’s broader climate policy framework could enhance such a technological shift (see Draghi, 2024, Chapter 3). Policy makers should focus on high-emitting sectors, such as energy and heavy industry, and provide incentives for climate-friendly technologies. Meanwhile, lower-emitting industries could benefit from policies that maintain progress and encourage further green innovation. Such an approach aligns with the EU’s climate agenda and ensures an effective transition to a low-carbon economy while strengthening the EU’s competitive position.

References:

Caliendo, L. & F. Parro (2015), Estimates of the trade and welfare effects of NAFTA, The Review of Economic Studies, Vol. 82(1), pp. 1-44.

Draghi, M. (2024), The future of European competitiveness – Part A: A competitiveness strategy for Europe, European Commission.

Flórez Mendoza, J., O. Reiter & R. Stehrer (2024), EU carbon border tax: General equilibrium effects on income and emissions, wiiw Working Paper, The Vienna Institute for International Economic Studies (wiiw), forthcoming.

Korpar, N., M. Larch & R. Stöllinger (2023), The European carbon border adjustment mechanism: a small step in the right direction, International Economics and Economic Policy, Vol. 20(1), pp. 95-138.

Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.

Javier Flórez Mendoza is an economist at the Vienna Institute for International Economic Studies (wiiw). His research focuses on international trade, trade policy, European integration, environmental economics and regional economics. He is a PhD candidate at the Vienna University of Economics and Business.

The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and a PhD candidate at the Leopold-Franzens University Innsbruck.

The US presidential candidate has announced massive tariff increases on US imports in general and against Chinese imports in particular in the event of his re-election. Such measures would further destabilise the global trading system and would also have a direct negative impact on incomes in export markets such as the EU and China. However, the consequences would be even greater for the US itself, as our calculations using a multi-sectoral equilibrium model show.

Introduction

As unpredictable as the outcome of the US presidential election on 5 November is, the possible consequences for international economic policy and the global trading system are just as uncertain. However, the latter depend not only on whether Kamala Harris or Donald Trump wins, but also on the but also on the post-election composition of the US Congress and the ideologies of its members. Harris and Trump pursue some of the same goals, such as protecting domestic industry, securing jobs, relocating lost industries back to the US, maintaining the country’s technological leadership and reducing US dependence on international supply chains. Nevertheless, their approaches differ considerably in terms of the radical nature of the planned measures, and the speed and method of their implementation. One major substantive difference concerns climate and environmental policy, where only Harris can be expected to take a constructive approach (see Stehrer, 2024).

The proposed tariff increases

One of Trump’s most important threats is the announced tariff increases to 10% for all US imports and possibly to 60% (or more) for imports from China; Trump has floated even higher tariffs at his campaign rallies. To assess the impact of such rises, it is first necessary to examine the current tariff rates (see Figure 1). On average, the EU imposes tariffs of 5.2% on the US and China; the US imposes tariffs of 3.5% on the EU and 3.6% on China. China imposes higher average tariffs of 7.5% on the EU and 7.6% on the US. The announced increase in US import tariffs to 10% under Trump would therefore mean a near-threefold increase.

Effects of these tariffs in a general equilibrium model

The effects of such tariff increases can be estimated using general equilibrium models. Calculations based on the model using the approach taken by Caliendo and Parro (2015) – for details, see Flórez Mendoza et al. (2024) – show that if US import tariffs were to rise to at least 10% (assuming that higher tariffs remain unchanged), total income in the US, including tariff revenue, would rise by 0.08%. However, real income excluding tariff revenue would fall by around 0.14%, mainly because imports would become more expensive. Incomes in China would fall by around 0.02%, while EU countries would be slightly more affected, with a decline of 0.05%. If tariffs on imports from China were increased to 60%, US income (including customs revenue) would rise by 0.12%, but real income would fall even more sharply, by 0.33%. In China, income losses in this scenario would be slightly higher, at 0.15%. For the EU27, the fall in income would be roughly unchanged. Overall, the global trade volume would fall slightly.

Conclusions

Our estimates show that the announced tariff increases on US imports would hit real incomes in the US itself the hardest; Clausing and Lovely (2024) and Baldwin (2024) argue similarly. The planned tariff increases would also have a (relatively) minor negative impact on the incomes of US trading partners.

Overall, it should be emphasised that our calculations build on the assumption of full employment and do not take any other factors into account. Relevant factors would include retaliatory measures and thus tariff increases by other countries against US imports, or further negative growth effects due to uncertainties and a decline in global trade flows. Such developments would result in stronger negative overall effects.

Although the announced tariff increases would have manageable overall effects on incomes and global trade, it can be assumed that such unilateral measures would further destabilise the international trading system under a Trump presidency.

References

Baldwin, R. (2024), Will Trump’s tariffs on China harm US manufacturing?, Factful Friday (via LinkedIn).

Caliendo, L. & F. Parro (2015), Estimates of the trade and welfare effects of NAFTA, The Review of Economic Studies, Vol. 82(1), pp. 1-44.

Clausing, K.A. & M.E. Lovely (2024), Why Trump’s tariff proposals would harm working Americans, PIIE Policy Brief 24-1, Peterson Institute for International Economics, May.

Flórez Mendoza, J., O. Reiter & R. Stehrer (2024), EU carbon border tax: General equilibrium effects on income and emissions, wiiw Working Paper, The Vienna Institute for International Economic Studies (wiiw), forthcoming.

Stehrer, R. (2024), Mögliche Auswirkungen der US-Präsidentschaftswahl auf den Welthandel, FIW-Jahresgutachten – Update Oktober 2024, Kapitel 2. Abrufbar unter: https://www.fiw.ac.at/publications/fiw-jahresgutachten-update-oktober-2024

Authors:

Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.

Oliver Reiter is an economist and data scientist at the Vienna Institute for International Economic Studies (wiiw). His research focuses on international trade, non-tariff measures in trade, the creation/updating of a multi-regional input-output database (such as WIOD) and agent-based macroeconomic models. He holds a Bachelor’s and a Master’s degree in Economics, a Bachelor’s degree in Statistics and a Master’s degree in Computer Science, all from the University of Vienna. He is currently pursuing his doctorate at the Vienna University of Economics and Business.

The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and a PhD candidate at the Leopold-Franzens University Innsbruck.”