CBAM – Steering the World Trade to Fit the Future

Abstract

A Carbon Border Adjustment Mechanism, also known as CBAM, is a policy proposed by the European Commission as a part of “Fit for 55” - an intermediate goal along the way to achieve the final goal of the European Green Deal: climate neutrality within 2050. The increased ambition level of the EU consists, among others, of phasing out free allowances and decreasing the overall cap of quotas in the EU ETS. Additionally, the Commission has proposed to introduce a CBAM. The CBAM will strive to prevent carbon leakage, protect the decarbonization initiatives in the EU/EFTA, incentivize third country producers to reduce emissions, and ensure that the price of imports to the EU/EFTA reflects their carbon content. In this thesis, we focus on Norway and analyze the effects, on both imports and production, when implementing the CBAM at the EU/EFTA border. First, we analyze the effects in the EU/EFTA aluminum market when both phasing out the free allowances and phasing in the CBAM. Second, we analyze the direct impacts of the CBAM on the imports of cement, fertilizer, iron & steel, and aluminum to Norway. We find that EU/EFTA producers and third country producers with low carbon intensities will be able to capture additional market shares as a consequence of the CBAM. This will cause a reduction in consumption-related emissions in the EU/EFTA. Whether total greenhouse gas emissions are reduced globally depends on whether foreign producers increase their ambition levels in line with the EU/EFTA. Furthermore, we calculate the direct impacts of the CBAM on Norwegian imports, comparing the effects of including scope 1 emissions versus scope 1+2 emissions in the policy. For both alternatives, the CBAM tariff will eliminate the most carbonintensive goods from the Norwegian imports. The cement sector is hit the hardest in relative terms, while the carbon content of imports is reduced the most in absolute terms in the aluminum sector. However, we find that the inclusion of scope 2 in the CBAM imposed on imports at the Norwegian border will not increase the efficiency of the policy.