CAREC Institute Releases Policy Brief on China’s Potential Response to EU Carbon Border Measures

A new Policy Brief by CAREC Institute Senior Research Specialist Ms. Marina Wang, analyzes the potential impact of the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM), set for full implementation in 2026, and explores China’s possible reciprocal carbon border measures. The research indicates CBAM could significantly affect global trade, especially for carbon-intensive sectors. It highlights that China, as a major emitter and exporter, needs to address carbon leakage while advancing its emission reduction targets. The study underscores the EU’s leading role in carbon pricing and notes that similar measures in other countries could have far-reaching effects on international economic and climate policies. It also examines the impacts of China imposing carbon tariffs, offering insights into potential trade adjustments and policy responses.

Using the GTAP-E model, the author simulates two scenarios: S1 (impose additional $50/ per ton CO₂e carbon tariffs) and S2 (extending to include the U.S.). The Policy Brief reveals modest declines in China’s total output (0.016% in S2) and significant export contractions to tariff-imposing regions like the EU and US, with trade diversion boosting flows to resilient markets such as ASEAN (up 129%).

The Policy Brief suggests:

• Provide time-limited, targeted subsidies for machinery and metal sectors exposed to CBAM markets, while maintaining support for high-tech and innovative industries.
• Integrate carbon tariffs with domestic fiscal governance and use them to further develop and refine China’s carbon pricing mechanisms.
• Design carbon tariff policies that are rational, actionable, and adaptable, with scientifically determined tax rates, robust impact assessments, and active public engagement.
• Pursue broad international acceptance by aligning carbon tariff policies with global climate and trade rules, diversifying trade partners, and promoting cooperation—such as initiating FTAs with African nations to offset losses in the EU and US markets.
• Address risks of trade diversion to non-regulated regions by strengthening research and expanding the policy toolkit for carbon-constrained trade.