Industrial relocation or shorter shipping routes? Examining the impact of the EU’s carbon border adjustment mechanism on global emissions using structural gravity

To address concerns over carbon leakage, the European Union (EU) has announced the introduction of a Carbon Border Adjustment Mechanism (CBAM), which started in October 2023. Using trade data for the year 2014, this study applies a structural gravity model to simulate the impact of CBAM on welfare, production, exports and emissions. Our main contribution is to include emissions from shipping activities into the structural gravity model, in addition to production, to offer a more comprehensive assessment of the CBAM’s environmental effect. Our results show that, while CBAM would have little effect on welfare, the policy would contribute to a reduction in exports, estimated between -0.29 % (metal products) and -1.49 % (iron and steel). In particular, we find that middle income economies are most affected by the policy, and that these countries tend to greatly reduce their exports to the EU. We also observe a rebound in production (and associated emissions) among the EU economies. Nevertheless, by including emissions from shipping activities, we find that CBAM would have resulted in a large amount of emission decrease, most of which is due to export reduction.