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Extending the Carbon Border Adjustment Mechanism to Indirect Emissions: Implications for Finland

Author

Listed:
  • Wang, Maria
  • Kuusi, Tero

Abstract

This report examines the planned extension of the EU Carbon Border Adjustment Mechanism (CBAM) to indirect emissions and its coordination with the existing indirect cost compensation under the EU Emissions Trading System. The study provides an overview of Finland’s CBAM sectors, estimates tariff elasticities using a gravity model for the years 2010–2023, and simulates three scenarios in which the inclusion of indirect emissions in the CBAM extension is combined with different changes to indirect cost compensation. The results indicate that import responses to the CBAM extension are most pronounced in the aluminium sector, while the effects on iron and steel are more moderate. The scenario analysis suggests that extending CBAM to indirect emissions would reduce imports by a few percentage points, whereas the simultaneous phase-out of indirect cost compensation would have only a limited additional impact. Consequently, the extension would help reduce the risk of carbon leakage, although it would also increase the cost of imports in Finland.

Suggested Citation

  • Wang, Maria & Kuusi, Tero, 2026. "Extending the Carbon Border Adjustment Mechanism to Indirect Emissions: Implications for Finland," ETLA Reports 178, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:report:178
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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • 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
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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