How Tariffs Shape Trade‐Embodied Emissions in the European Union: Sectoral Heterogeneity in Final Demand

This paper examines the environmental implications of tariffs on greenhouse gas emissions embodied in extra‐European Union imports consumed by domestic final demand in the EU. Using a multidimensional country‐sector‐year framework, the study investigates whether tariff changes are associated with variations in trade‐embodied emissions and whether those associations differ across sectors. To achieve this, a high‐dimensional fixed‐effects model is employed, including additional control variables such as foreign value‐added in final demand, renewable energy consumption, global energy prices, and inflation rate. The results show that the environmental effects of tariffs are not uniform. On average, higher tariffs are associated with higher emissions embodied in extra‐EU imports, suggesting that supply‐chain disruption, trade diversion, and sourcing reallocation may outweigh substitution towards less emissions‐intensive domestic or intra‐EU production. At the same time, the sectoral analysis reveals substantial heterogeneity. In sectors characterised by stronger external dependence and more rigid supply‐chain structures, higher tariffs are associated with more emissions‐intensive sourcing patterns, whereas in sectors with greater domestic or intra‐EU substitution capacity the opposite pattern emerges. These findings highlight the need for sector‐specific trade and environmental strategies, as well as greater coherence between general tariff policy and the carbon border adjustment mechanism.