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The global effects of carbon border adjustment mechanisms

Author

Listed:
  • Clausing, Kimberly
  • Colmer, Jonathan Mark
  • Hsiao, Allan Jer-Yu
  • Wolfram, Catherine

Abstract

Climate change poses a collective action problem: individual countries bear the costs of carbon regulation, while the benefits are shared globally. Carbon border adjustment mechanisms (CBAMs), which are currently being implemented by the EU and UK, aim to realign incentives by improving domestic competitiveness, reducing emissions leakage, and encouraging other countries to tax carbon. However, policy discussions also note that CBAMs could unfairly disadvantage lower-income trading partners. We evaluate these issues with a quantitative trade model and plant-level data for two key industries - steel and aluminum - which are the focus of early CBAM implementation. Together, they account for 14% of global emissions. We show that CBAMs can facilitate collective climate action, while largely avoiding disproportionate burdens on lower-income countries.

Suggested Citation

  • Clausing, Kimberly & Colmer, Jonathan Mark & Hsiao, Allan Jer-Yu & Wolfram, Catherine, 2025. "The global effects of carbon border adjustment mechanisms," LSE Research Online Documents on Economics 141602, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:141602
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    File URL: https://researchonline.lse.ac.uk/id/eprint/141602/
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    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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