The EU’s CBAM trinity in LNG supply: Modeling global trade flows, supply risks and upstream emissions

The EU introduced the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage from imports such as liquefied natural gas (LNG) and to align trade with its decarbonization goals. This study examines how the global LNG market evolves under the assumption that the EU’s CBAM is in effect. Specifically, it investigates: (i) how exchanged LNG volumes and market structures between exporters and importers shift in response to the CBAM; (ii) how related supply risks and upstream emissions are affected; (iii) how effective the CBAM is in reducing carbon leakage and rebalancing supply costs, risks, and emissions; and (iv) which policy options the EU could apply when recycling CBAM revenues to enhance its effectiveness. In order to answer these questions, this work numerically characterizes the global LNG market under the assumption that the EU’s CBAM is in effect. We introduce a multi-objective mixed-integer linear program designed to balance LNG supply costs, supply risks, and upstream emissions. The objective function of the model is to minimize the sum of LNG importers’ supply costs, associated supply risks, and supply concentration. Within the model, CBAM revenues can be recycled and redistributed to exporters to incentivize upstream emission reduction measures, which subsequently reduce their supply risk — a mechanism akin to a ”reward.” We examine the economic and geopolitical impacts under various medium-term scenarios. Including LNG in carbon pricing not only reshuffles trade dynamics but also generates revenues that could incentivize the effective upstream emission reduction of imports. Several promising avenues for future research remain, including exploring the effects of alternative redistribution rules within the policy framework and assessing their implications for equity and efficiency.