On Carbon Tariffs and Price Distortions: A study of the EU’s CBAM and imports from China

Sammanfattning: Consumption-based emissions have increased rapidly during the last few decades and measures to battle climate change have included numerous initiatives to reduce greenhouse gas emissions. The European Union is currently in the process of implementing its new Carbon Border Adjustment Mechanism, to level the playing field between domestic producers and importers by setting the same requirements concerning carbon emissions. This mechanism is supposed to minimise carbon leakage by applying carbon tariffs to EU actors importing goods from countries outside the EU. This paper investigates how carbon tariffs affect global trade flows by analysing the possible effect on the EU’s imports from China in the production sectors covered by the proposed first phase of CBAM. The theoretical framework is loosely based on the Gravity Model of trade theory. Price sensitivity and embodied emissions are estimated to study the effect of the carbon tariff in a regression model, with the results suggesting a significant decline in demand for Chinese imports.