The Potential of Carbon Border Adjustments to Foster Climate Cooperation

We evaluate the potential of the European Union’s Carbon Border Adjustment Mechanism (EU CBAM) to foster a climate coalition. Using a general equilibrium quantitative trade model to evaluate the payoffs of a coalition formation game, we find that the EU CBAM motivates the adoption of carbon pricing in four countries. This results in a 73% greater reduction in global emissions compared to a scenario in which only the EU prices carbon, with the coalition-building effect outweighing the direct anti-leakage effect of the CBAM. This effect holds across a broad range of policy designs and modeling assumptions. The size of the induced climate coalition varies strongly with trade elasticities and marginally with input substitutability. Next to the carbon price level, the CBAM implementation plays a decisive role: a CBAM that covers more products or indirect emissions leads to larger coalitions. By contrast, introducing export rebates renders the coalition unattractive.