ECB research finds small overall CBAM trade impact, large for specific products
A new working paper from the European Central Bank assesses the direct impact of the EU's Carbon Border Adjustment Mechanism (CBAM) on member states and trading partners. The study finds the overall trade impact to be small, but potentially sizeable for specific products like iron and steel.
CBAM's targeted impact on trade
The EU Carbon Border Adjustment Mechanism (CBAM), introduced on October 1, 2023, aims to address carbon leakage and create a level playing field for EU producers.
A new ECB working paper assesses its direct impact on EU member states and trading partners.
The study estimates the overall direct impact on EU countries' trade to be small, adding 0.1 percent to the value of EU imports when averaged across all imports.
It also adds 0.04 percent to the average cost of non-EU countries' exports to the EU, with a maximum of 1.2 percent.
However, the effects could be sizeable for specific products such as iron, steel, and aluminium, which explains CBAM's political salience.
The CBAM currently covers six categories of energy- and emissions-intensive products: aluminium, cement, electricity, iron & steel, and fertilizers.
An expanded CBAM with full coverage of ETS sectors and a significantly higher carbon price could entail larger costs in the future.
Addressing carbon leakage and competitive fairness
The CBAM is a key component of the EU's 'Fit for 55' policy package, designed to counter carbon leakage from differing carbon prices.
It imposes a levy on imports based on their carbon content and price differential, aiming to level the playing field for EU producers within the EU market.
However, the current design lacks export rebates, placing EU exporters at a competitive disadvantage in non-EU markets.
The mechanism has faced significant resistance from developing countries, who view it as a de facto trade barrier.
Critics also argue it undermines the principle of common but differentiated responsibilities and risks retaliatory measures.
Targeted impact, complex challenges
This ECB working paper offers crucial early insights into the direct trade impacts of the EU CBAM.
While confirming its targeted nature for specific sectors, it also highlights competitive disadvantages for EU exporters and strong international opposition.
Future research must urgently address broader supply chain effects and potential trade distortions for a truly comprehensive picture.