Activites

Despite the benefits of the Carbon Border Adjustment Mechanism (CBAM) within the EU economy, the impact it will have on EU global trade partners remains unclear. SPES partners from PEP – Partnership for Economic Policy in their SPES Focus “A GVAR analysis of the macroeconomic effects of the Carbon Border Adjustment Mechanism in the Global South” assess the macroeconomic impacts of CBAM on international trade dynamics between the EU and its partners in both the Global South and the Global North. The impact simulation is made through an advanced global Vector Autoregression (GVAR) framework. The paper highlights the possibility the CBAM could provoke trade tensions between the EU and its trading partners, thus, the aim of this study is to provide valuable insights to EU policymakers regarding carbon pricing strategies and mitigation.

The Carbon Border Adjustment Mechanism (CBAM), introduced by the European Union to come into effect in 2026, is a form of carbon taxation that falls under carbon pricing mechanisms. Its purpose is to promote a clean energy transition, encourage the adoption of green technologies in energy-intensive countries and sectors, and mitigate risks associated with climate change and climate-related impacts.

Impact assessment

Studying the CBAM is crucial to understanding its global macroeconomic impacts, which has remained relatively unclear until now. This is why this SPES Researchers focus on the macroeconomic effects of the CBAM beyond the EU, dedicating particular attention to its implications for economic growth and macroeconomic stability in Global South countries. A key concern regarding the CBAM is its potential to influence energy policies and macroeconomic conditions globally, possibly leading to shockwaves in commodities, demand, and supply, as well as trade and financial flows between nations.

Given that the Global South consists mainly of developing countries, which are more vulnerable to external shocks, this research is essential in examining their resilience—or lack thereof—to the carbon tax on imports destined for the EU, particularly considering the EU’s significant role as a major global trading bloc.

To conduct the study, Researchers employ a global Vector Autoregression (VAR) technique to connect the macroeconomic fundamentals of countries making up about 90 per cent of the global economy. This method facilitates policy simulations and shock analyses, advancing the methodological contributions of previous studies like those of Pan and Liu (2024) and Bellora and Fontagné (2023). The methodology also accounts for any possible dynamic adjustments in production and trade as many partners transition to low-carbon energy. This is critical for understanding responses to the Carbon Border Adjustment Mechanism (CBAM) and highlights limitations in traditional input-output models that may produce biased outcomes.

Main recommendations

This study highlights the far-reaching negative welfare consequences CBAM policy could have, especially because of its adverse potential to disrupt global macroeconomic conditions (e.g. affecting supply chains & aggregate demand) and spiral into trade wars. The EU is therefore advised to consider adopting relevant mitigation measures to moderate the negative effects of the policy on global welfare outcomes. Such strategies could include the exemption of poor and vulnerable countries, particularly those with low emission levels (in addition to the proposed exclusion of low-carbon sectors) from the scheme, as well as yielding to the call to set aside a large chunk of the revenues accrued from the CBAM to finance climate action programs in countries that are not only poor but are also adversely affected by the policy to fund their activities aimed at implementing the Paris agreement.