Antton Haramboure

Finally, after months of quiet observation, this is my first Bluesky thread! A bit of help would be very welcome to share it beyond my growing but still limited audience!

A huge thanks to my co-authors, Antoine Dechezlepretre, Clara Kögel, Guy Lalanne and Norihiko Yamano, as well as my managers for trusting me with this project two years ago despite my then-limited expertise in carbon markets. I had a blast working on this!

Carbon Border Adjustments Disparities in carbon pricing and other climate policies across countries can raise the risk of carbon leakage. To address this, the European Union introduced a Carbon Border Adjustment Mechanism (CBA...

Want to know more about the impact of the EU ETS reform and the EU CBAM on emissions, trade, and global value chains? Here are some links to read more about our paper - the WP : www.oecd.org/en/publicati... +

In this regard, the data collected by the European Commission will be invaluable for refining future BCAs, supporting further research, and guiding global policy discussions on carbon pricing and trade

Finally, for the many countries contemplating introducing a Carbon Border Adjustment, the EU CBAM offers a proof of concept for such a policy to address carbon leakage while also illustrating its potential unintended economic consequences.

Third, CBAM's long-term impact will depend on firms’ ability to decarbonise production both within and outside the EU and on policy responses from exporting countries, including the adoption of carbon pricing, other BCAs, or adjustments to existing fossil fuel taxes.

The Commissions Omnibus proposal aims to simplify CBAM declarations and limit its scope to large EU importers. While this may reduce administrative costs, it must preserve accurate carbon measurement and incentives decarbonisation. Small non-EU exporters are also left out of the simplification scope

Second, the paper is also silent about measurement, reporting, and verification and implicitly assuming accurate measurement at no cost and full compliance. In reality, administrative burdens and compliance costs remain substantial challenges, notably for small importers and exporters.

Modelling this would be key but would require detailed within-country data on the distribution of the carbon intensity.

First resource shuffling, whereby CBAM goods produced using emissions-intensive processes are consumed domestically while the same goods produced using more efficient processes are exported to the EU could increase carbon leakage.

Our simulations have several limitations discussed extensively in the paper that also include sensitivity checks using different key parameters (trade elasticity, carbon prices). Let's mention a few of the aspects that we do not model but that will be critical for the long-term success of the policy

We simulated extending CBAM coverage to 1,400 additional emission-intensive products and show limited additional impact (-0.08% EU value-added, -0.02% global emissions) underlying that the initial CBAM coverage was well targeted to the most emission intensive goods.

We also simulated extending CBAM coverage to 1,400 additional emission-intensive products and showed limited additional impact (-0.08% EU value-added, -0.02% global emissions), underlying that the initial CBAM coverage was well targeted to the most emission-intensive goods.

Note: This figure plots the simulated change in value added in the Full Policy Mix Scenario (increase in EU ETS price + removal of free allowance + CBAM) compared to the baseline scenario across CBAM industries in non-EU countries against the initial emission intensity in production of that country. Emission intensity is computed as the total emission of the CBAM sectors over their production. The share of trade in the intermediate goods covered by CBAM in total trade in CBAM sectors as of 2019 is mapped to the size of the data point. Additionally, the colour of each data point indicates the difference in carbon price between the local price and the EU ETS price. Ukraine, Belarus and Russia are dropped from this analysis, as well as Norway, Island, and Switzerland that are not covered by the CBAM. Source: OECD computations

Gains are more pronounced for countries with less emitting production processes that serve a larger part of the EU demand (e.g., Türkiye, Chile, Mexico). On the contrary, countries like South Africa see a small decrease in the value added of their CBAM-covered sectors.

Looking at the simulated economic impact of the joint implementation of the EU ETS reforms and the CBAM on the partner economy, we see that most countries gain slightly from the policy package. But all partners do not benefit equally

The CBAM reverses this leakage, encouraging global emissions reductions. Under the CBAM, each ton of CO₂ reduced in the EU leads to an additional 0.12 tons cut abroad. How does this work?

Now turning to emissions, the ambitious reforms of the EU ETS lead to carbon leakage—175 Mt CO₂ reductions within the EU are offset by increases abroad (34 Mt CO₂, leakage rate ~19%). Some of the EU production is offshored to partner countries.

To conclude on EU competitiveness, the CBAM partially mitigates the economic impact of the EU ETS reform on covered industries, but losses in downstream sectors almost perfectly balance the gains in covered industries.

Note: The dot and the bar represent the simulated value added, respectively, in Scenario 2 (Increase in price in the EU ETS + removal of free allowance) and in the Full Policy Mix Scenario (Scenario 2 + CBAM) compared to Scenario 1 (Increase in price in the EU ETS) for all industries in EU countries (left panel) and for non-EU countries (right panel). All scenarios include the removal of free allowance in non-EITE sectors. The difference between the dot and the bar can be interpreted as the impact of implementing the CBAM. Sectors covered by the CBAM are highlighted in red and bold font on the y-axis. Services and several manufacturing sectors are grouped under the “Services” and “Other Manufacturing”. Source: OECD computations.

The Fabricated Metals sector illustrates CBAM's limits: despite being covered, its EU value added falls with the CBAM due to indirect costs from inflated input prices (especially steel).

Note: The dot and the bar represent the simulated value added, respectively, in Scenario 2 (Increase in price in the EU ETS + removal of free allowance) and in the Full Policy Mix Scenario (Scenario 2 + CBAM) compared to Scenario 1 (Increase in price in the EU ETS) for all industries in EU countries (left panel) and for non-EU countries (right panel). All scenarios include the removal of free allowance in non-EITE sectors. The difference between the dot and the bar can be interpreted as the impact of implementing the CBAM. Sectors covered by the CBAM are highlighted in red and bold font on the y-axis. Services and several manufacturing sectors are grouped under the “Services” and “Other Manufacturing”. Source: OECD computations.

The EU Basic metal industry benefits significantly from CBAM, reducing its value-added losses from nearly -3% (driven by the removal of free allowances) to -1%. However, downstream industries reliant on these metals, such as machinery, experience adverse impacts - CBAM = diff btw green dot and bar

The simulation results show that the EU ETS reform raises production costs in the EU, negatively impacting its competitiveness. For the sectors it covers, the CBAM partially offsets this effect by levelling the playing field in the EU domestic market.

Importantly, we do not simulate the impact of the CBAM alone but rather along with the effect of the EU ETS reforms within the Fit for 55 package.

These types of value chain mechanisms motivated us to explore the impact on downstream industries, as these are key to fully grasping the potential final impact of CBAM. We simulate them based on an enhanced input-output model, designed to capture the first-order effects in the short run.

For car makers, the introduction of the CBAM will impact the price of the steel they can buy on the EU markets. This will, in turn, negatively impact both their domestic and export competitiveness.

For EU steel producers, implementing the CBAM will improve their competitiveness in the Common Market as importing steel will become more costly due to the levy on their embedded emissions. However, the CBAM will not impact the competitiveness of EU producers in their export markets

As CBAM targets only specific goods, its protective benefits are limited to covered EU sectors. Non-covered downstream sectors, reliant on these goods, indirectly face higher input costs, impacting their overall competitiveness. To illustrate this, let’s take the example of steel and car producers.

In the second part of the paper, we simulate the impact of the CBAM on trade, value-added, and emissions in the EU and its trade partners.

It would have covered 171 Mt of CO₂ equivalent, representing just 0.31% of global emissions. Importantly, Scope 2 and 3 emissions would account for 25% of the total embedded emissions covered. The levy would have generated about 14.7 billion euros in revenue.

Our results highlight CBAM's relatively narrow coverage: Had it been in place in 2022, the CBAM would have applied to only 0.37% of global trade and 3% of EU imports. Iron and steel imports, notably from China, Türkiye, and Russia, dominate the coverage.

Another complexity: CBAM's emission coverage varies by product. While all products include direct emissions (Scope 1), only specific goods account for electricity-related (Scope 2) and certain upstream emissions (Scope 3). Our paper details a methodology to measure these.