Product-Specific Response Strategies for the EU CBAM: Balancing Carbon Mitigation and Economic Welfare

Abstract The EU Carbon Border Adjustment Mechanism (CBAM) imposes charges on the emissions embedded in specific imported products to address the risk of carbon leakage. Previous national-level studies widely recognized the negative welfare effects associated with such mitigation efforts. However, the impact of product heterogeneity on the effects of the CBAM remains ambiguous. Here we integrate a product-level CBAM-equivalent tariff accounting model with a multi-country partial equilibrium model to quantify the impacts of the CBAM on CO2 emissions and national economic welfare, focusing on 222 HS6 (6-digit Harmonized System) steel products affected by the CBAM across the EU and its 13 major trading partners. We find that these impacts of the CBAM vary widely across products, depending on their export values, embedded emission intensity, and export dependence on the EU market. The CBAM is not cost-effective in mitigation for specific products. Therefore, we propose a plausible solution to return CBAM revenues to these products, which could increase welfare by US$718.97 million and achieve further emission reductions. Our results emphasize the importance of product-level analysis to identify heterogeneous impacts and formulate targeted mitigation strategies to improve the inclusiveness and effectiveness of the CBAM.