Expanding carbon pricing boundaries and the EU CBAM: insights into China and India

Implemented alongside the EU Emissions Trading System revision, the Carbon Border Adjustment Mechanism (CBAM) requires importers of selected energy-intensive commodities to purchase certificates reflecting the EU carbon price. Designed to prevent carbon leakage and incentivise cleaner industrial production, CBAM has sparked heated academic and political debate, raising questions about its economic and environmental effectiveness and its interaction with emerging carbon pricing regimes outside the EU. This paper examines how the evolution of carbon pricing in China and India, two major emitters and key trading partners of the EU, could influence the effects of CBAM through its exemption mechanism, shaping prospects for international climate policy alignment. It further provides an ex-ante assessment of CBAM's impacts under its legislated design, including its sectoral scope, implementation timeline, and the phase-out of free allowances in the EU ETS. The analysis applies FIDELIO, a global, multi-sectoral, recursively dynamic general equilibrium model, to quantify impacts on trade, production, and emissions. Results show that CBAM has limited aggregate macroeconomic and environmental effects but induces significant structural changes within the EU in highly energy-intensive sectors, including substitution from imports of carbon-intensive goods toward relatively cleaner production and emerging intra-EU disparities. When China and India implement stronger carbon pricing, CBAM's trade impacts diminish, yet cross-country asymmetries between major trading partners persist. Overall, the findings highlight CBAM's modest direct effects but underline its potential to act as a lever for greater international ambition in climate policies.