New Policy Brief Examines the Effects of the EU’s CBAM on China and Other CAREC Economies

A new policy brief by Senior Research Specialist Dr. Marina Wang from the CAREC Institute examines the potential effects of the European Union’s Carbon Border Adjustment Mechanism (CBAM) on China, with broader insights for other CAREC economies. Using the advanced GTAP E global trade and energy model, the study assesses how CBAM could impact GDP, welfare, trade patterns, sector performance, and export markets under two different scenarios.

CBAM, scheduled for full implementation in 2026, connects carbon pricing with cross-border trade. The analysis suggests that, with broad coverage, China’s GDP could decrease by 0.33 percent, while the EU’s GDP could rise by 1.29 percent. Most of the EU’s welfare gains, around 72 to 85 percent, are attributed to reduced carbon leakage rather than increased trade competitiveness.

Key Findings from the China Case Study

• Sharp reductions in China–EU trade in carbon intensive goods are only partially offset by trade diversion toward the United States, United Kingdom, ASEAN, BRICS, and other untaxed markets.
• High carbon sectors such as metals, chemicals, and cement experience the largest losses, while some low carbon sectors, including pharmaceuticals, machinery, and paper products, see modest growth.
• Broadening CBAM’s scope from selected high carbon industries to the whole economy magnifies GDP and welfare losses and accelerates shifts in export markets.

Implications for the CAREC Region

As a major CAREC economy and key trading partner, China’s experience with CBAM is directly relevant to its neighbors. Many CAREC economies share similar export profiles, sector structures, and carbon intensity, making them vulnerable to CBAM-related risks. Trade shifts affecting China could also reshape regional trade, investment, and competition within CAREC.

The policy brief recommends a phased response for CAREC economies:

Short term (2024 to 2026): Set up CBAM-compliant carbon accounting systems and adopt emissions benchmarks in high-risk sectors like steel and cement.

Medium term (2026 to 2030): Strengthen regional carbon market links, aiming for 60 percent emissions coverage by 2030, and invest 30 percent of carbon pricing revenues in low-carbon innovation and industry upgrades.

Long term (after 2030): Create a unified CAREC “carbon label” aligned with global standards to maintain market access and seek agreements with the EU on CBAM revenue sharing to support a fair transition.

Adopting these measures could reduce CAREC’s aggregate GDP losses from CBAM by 40–60%, while positioning the region as an active participant in the global low carbon economy.