ADB BRIEFS

NO. 276
NOVEMBER
2023

KEY POINTS
European Union Carbon Border
• Quantitative analyses
suggest that the value of the
Carbon Border Adjustment
Adjustment Mechanism: Economic
Mechanism (CBAM) in
terms of mitigating climate Impact and Implications for Asia
change is marginal. However,
its impacts on trade patterns,
competitiveness, and income
distribution are far from Cyn-Young Park Yuya Yamamoto
negligible, especially for Director, Regional Cooperation Trade Specialist, Regional Cooperation
developing economies. and Integration and Trade Division and Integration and Trade Division
• The overall economic impact Climate Change and Sustainable CCSD
of the CBAM seems to be
Development Department (CCSD) ADB
limited for Asian economies,
but some economies face Asian Development Bank (ADB)
significant cost increases at Maria Anne Lorraine Doong
the sector level, such as India Consultant, Regional Cooperation
in the iron and steel sector, and Integration and Trade Division
Georgia in fertilizer, and
Kazakhstan in aluminum. CCSD
• The CBAM presents an ADB
opportunity for Asian
economies to focus on
developing their carbon
markets, while tackling
shortfalls in investments OVERVIEW
required to develop
renewable energy sources.
The European Union (EU) aims to become the first climate-neutral economic bloc
• CBAM-affected economies by 2050, through the EU Green Deal. In 2021, the EU strengthened this commitment
could consider responding by by adopting the “Fit for 55” package, which upholds an interim target of reducing net
upgrading the value added
greenhouse gas emissions by at least 55% by 2030 from a 1990 baseline. This ambition
of their exports to avoid the
carbon tariff. poses an increased risk of carbon leakage—where carbon-intensive industries shift
production to economies with less stringent environmental regulations.
• Diversification of export
markets, increasing the
productive capacity of To address potential carbon leakage, the EU Green Deal includes the Carbon Border
non-CBAM sectors, and Adjustment Mechanism (CBAM), which imposes a carbon tariff on carbon-intensive
building statistical capacities products such as iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen.
may help mitigate the risk These items were selected because they are highly susceptible to carbon leakage and
exposure to CBAM in the create significant carbon emissions that nevertheless can be tracked (Simões 2023).
short term.
The European Commission considers CBAM a “landmark tool” for putting a fair price
on carbon emissions generated during the production of identified goods (European
Commission n.d.). The CBAM imposes a carbon price on imports of emissions-intensive and
trade-exposed (EITE) goods to ensure they have a similar carbon price to domestic products.
It also aims to prevent carbon leakage. CBAM prevents carbon leakage by “subjecting the

Note: In this publication, “$” refers to United States dollars.

ISBN 978-92-9270-487-2 (print)
ISBN 978-92-9270-488-9 (electronic)
ISSN 2071-7202 (print)
ISSN 2218-2675 (electronic)
Publication Stock No. BRF230561-2
DOI: [Link]
ADB BRIEFS NO. 276

import of certain groups of products from third economies (non-EU embodied carbon payment per dollar of export to the EU
and non-EFTA) to a carbon levy linked to the carbon price payable (the exporter’s emission intensity multiplied by a $100 per ton
under the EU Emissions Trading System (ETS), supposing if the same carbon price). Economies with a high score on the CBAM exposure
goods were produced within the EU,” according to Deloitte (2023). index are likely to be more affected than economies with a low score.
Canada, the United States, and the United Kingdom are also exploring
mechanisms for border carbon adjustment. The World Bank has also created a relative exposure index. This is
calculated by multiplying the same export share by the difference
The CBAM regulation entered into force the day after its between the exporter’s emission intensity and the EU average
publication in the EU’s Official Journal on 16 May 2023. The EU emission intensity for the CBAM product, scaled by the assumed
plans to implement the CBAM in two stages. First, the transitional CBAM price of $100 per ton of carbon (World Bank 2023).
phase started on 1 October 2023. During this stage, importers of A positive relative exposure index indicates that an economy has
CBAM goods are required to submit quarterly reports indicating: higher carbon-emission intensity than the EU average, and so
(i) quantities of CBAM goods imported during the quarter, will likely have higher costs under CBAM. On the other hand, a
specified per economy of origin per production site; (ii) embedded negative relative exposure index shows that an economy has lower
direct and, if applicable, indirect greenhouse gas emissions; and emission intensity than the EU average. For example, if Georgia has
(iii) the carbon price due in the economy of origin, if applicable. an aggregate relative CBAM exposure index score of 0.0464, then
the additional cost will be $4.64 per ton of carbon dioxide (CO2)
In the second stage of the CBAM, from 1 January 2026, the full emitted. The index also includes the aggregate CBAM exposure index
scope of regulation will take effect, with price adjustments on which results from multiplying the exports of all covered sectors of
imported products. Importers will need to: (i) obtain authorization the products to the EU by the sum of the total embodied carbon
to import CBAM goods, (ii) declare the quantity of CBAM goods payments (the assumed price multiplied by the exporter’s emission
imported into the EU in the preceding year along with their intensity of all covered sectors of the product), divided by the sum of
embedded greenhouse gas emissions, and (iii) surrender CBAM the economy’s total value of exports of CBAM products to the world.
certificates to cover the declared emissions (Deloitte 2023).
Asian Exposure by Economy
The CBAM will be phased in alongside the phasing out of free Figure 1a shows that, among the accounted economies, ADB’s regional
allowances under the revised ETS. The mechanism will initially members are not among the top CBAM product exporters to the
include six selected industries: cement, aluminum, fertilizers, EU as a share of their total CBAM-affected products exported to
electricity, iron and steel, and hydrogen, in addition to some the world. Exporters of CBAM products to the EU are dominated by
precursors and a few downstream products. Under certain economies in Africa, the Middle East, and Europe. Asian economies
conditions, indirect emissions will be included. are predominantly at the middle to the tail end of the graph, led by
Georgia with 34.80%, Cambodia with 19.18%, and India with 18.92%.

ASIA’S EXPOSURE TO THE CBAM Figure 1b presents the exports of CBAM-affected products to
the EU as a percentage of the gross domestic product (GDP) of
The introduction of the CBAM has significant economic implications 57 economies. Economies in Africa show a high share of CBAM
for trade and investment, especially in developing economies. A products in their GDP, with Mozambique (6.9%) as the top exporter.
United Nations Conference on Trade and Development (UNCTAD The exports of CBAM products are not very economically significant
2021) study found that the CBAM could alter trade patterns in even for the largest regional exporter such as Georgia (0.3%).
favor of economies with relatively carbon-efficient production
and suppress exports from developing economies with carbon- Georgia has the highest aggregate relative CBAM exposure index,
intensive industries. Economies with EITE products as a large share with a score of 0.0464. India comes next with 0.0303, followed by
of exports will be particularly exposed. Also, risks in adapting to the Kazakhstan with 0.0051, Viet Nam at 0.0043, and Hong Kong, China
CBAM would increase in economies reliant on the EU as an export at 0.0033, as in Figure 1c. This suggests additional costs from CBAM
market and in economies lacking the capacity to track and report implementation will be $4.64 per ton of CO2 emissions for Georgia
production-related carbon emissions. Economies that struggle to and $3.03 for India. For most Asian economies, the additional costs
adjust to a low-carbon paradigm may also be at higher risk of impact. are less than $1 per ton of CO2 emissions.

Risks can be tracked based on the exposure and vulnerability of

economies to the CBAM. The World Bank has developed the Asian Exposure by Sector
CBAM Exposure Index to help economies make policy decisions. While Asia’s overall exposure to the CBAM seems limited,
The index gauges the potential for CBAM to impact exports the impact could be significant for certain sectors and for some
of carbon-intensive goods for the six selected industries. It is economies. The region’s sector exposures are shown in Figures 2
calculated by multiplying the export share of each economy by the to 5.1 Data shows the exports of CBAM products.2

1
The World Bank database does not have data on all ADB regional members. Presented data are only those available.
2
Iron and steel; fertilizer; cement; and aluminum; no data on hydrogen; no data on ADB’s regional members for electricity.

2
 % %

0.0500

0.0300

-0.0100
0.0700

-0.0300
0.0900

0.0100
Zimbabwe

0.0000
1.0000
6.0000
7.0000
100.0000

40.0000

20.0000
60.0000
80.0000
90.0000

30.0000
50.0000
70.0000

10.0000
0.0000
Ukraine Mozambique
Cameroon

2.0000%
Georgia Ukraine
Zimbabwe

regional members.
India Belarus
Mozambique
Belarus Bahrain
United Kingdom
Trinidad and Tobago Trinidad and Tobago
Albania

Source: World Bank 2023.

Egypt, Arab Rep. Türkiye
Belarus
Russian Federation Albania Venezuela
Venezuela Russian Federation Türkiye
South Africa Tunisia Tunisia
Kazakhstan Zimbabwe Egypt, Arab Rep.
Türkiye Egypt, Arab Rep. Ukraine
Iran, Islamic Rep. United Arab Emirates Ghana
Viet Nam Morocco Georgia
Tunisia Georgia Russian Federation
Hong Kong, China Taipei,China Israel
Brazil Cameroon Jordan
PRC South Africa Chile
Indonesia United Kingdom Cambodia
Oman Republic of Korea India
Pakistan Jordan Tajikistan
Azerbaijan Kazakhstan South Africa
Argentina Venezuela Azerbaijan
Peru Ghana Morocco
Malaysia Viet Nam United Arab Emirates
Saudi Arabia Oman Bahrain
Kuwait Malaysia Kazakhstan
Thailand India Taipei,China
Azerbaijan Trinidad and Tobago
Mexico
Tajikistan Brazil
United Arab Emirates
Chile Colombia
United States
Brazil Republic of Korea
Bahrain
PRC United States
Republic of Korea
Indonesia PRC
Philippines
Iran, Islamic Rep. Indonesia
Mozambique
Israel Viet Nam
New Zealand Thailand Malaysia
Canada Canada Iran, Islamic Rep.
Singapore Cambodia Hong Kong, China
Tajikistan

c. Aggregate Relative CBAM Exposure Index

New Zealand New Zealand
Costa Rica
b. CBAM Products Export to the EU (% of GDP)

Saudi Arabia Thailand

Figure 1: CBAM Exposure of Selected Economies

Australia Qatar Kuwait

Qatar Mauritius Sri Lanka
Cameroon Japan Oman
Ghana Colombia Canada
Japan Senegal Saudi Arabia
Sri Lanka Mexico Argentina
Senegal Argentina Japan
Taipei,China United States Mexico
Mauritius Hong Kong, China Mauritius
a. CBAM Products Exports to the EU (% of total CBAM products exports to world)

Cambodia Australia Philippines

United Kingdom

CBAM = Carbon Border Adjustment Mechanism, EU = European Union, GDP = gross domestic product, PRC = People’s Republic of China.
Singapore Australia
Morocco Costa Rica Pakistan
Chile Pakistan Peru
Israel Kuwait Senegal
Jordan Sri Lanka Singapore
Colombia Peru Costa Rica

Note: The World Bank’s database for the CBAM analysis includes 57 economies, 20 of which are regional members of ADB. Orange bars represent ADB’s
Albania Philippines Qatar

3
European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia
ADB BRIEFS NO. 276

Figure 2: Asian CBAM Exposure—Iron and Steel

a. Exports of iron and steel to EU (% of total iron and steel exports to the world)
100.00
90.00
80.00
70.00
60.00
%

50.00
40.00
30.00
20.00
10.00
0.00

Republic of Korea
Zimbabwe
Switzerland
Norway
United Kingdom
Tunisia
Albania
Venezuela
Belarus

Egypt, Arab Rep.

Ukraine
Cambodia
Russian Federation
India
Senegal
Israel
Mozambique
Kuwait
South Africa
Taipei,China
Brazil
Morocco
United States

Georgia
PRC
Indonesia
Iran, Islamic Rep.
Viet Nam
New Zealand
Malaysia
Australia
Thailand
Hong Kong, China
Kazakhstan
United Arab Emirates
Oman
Argentina
Azerbaijan
Trinidad and Tobago
Sri Lanka
Japan
Mexico
Costa Rica
Saudi Arabia
Peru
Canada
Bahrain
Chile
Philippines
Singapore
Pakistan
Qatar
Colombia
Türkiye

b. Relative CBAM Exposure Index

0.1000

0.0800

0.0600

0.0400

0.0200

-
Zimbabwe
Ukraine
India
Albania
Egypt, Arab Rep.
Venezuela
Russian Federation
South Africa
Mozambique
Georgia
Kazakhstan
Belarus
Tunisia
Hong Kong, China
Viet Nam
Iran, Islamic Rep.

Azerbaijan
PRC
Oman
Trinidad and Tobago
Brazil
Indonesia
Argentina
Kuwait
Peru
United Arab Emirates
Bahrain
New Zealand
Thailand
Pakistan
United States
Malaysia
Mexico
Canada
Saudi Arabia

Philippines
Singapore
Colombia
Costa Rica
Australia
Qatar
Chile
Japan
Sri Lanka
Israel
Taipei,China
Republic of Korea
Türkiye

Cambodia
Senegal
Morocco
United Kingdom
(0.0200)

CBAM = Carbon Border Adjustment Mechanism, EU = European Union, PRC = People’s Republic of China.
Note: Orange bars represent ADB’s regional members.
Source: World Bank 2023.

Cambodia leads in exports of iron and steel to the EU, which marks Hong Kong, China at 0.0055, and Viet Nam at 0.0054. India faces
34.25% of its total iron and steel exports. This is followed by India the highest additional cost from CBAM implementation in iron
with 23.55%; Taipei,China with 13.22%; the Republic of Korea with and steel, but it’s still $4.36 per ton of CO2 emissions. For other
10.66%; Georgia with 9.43%; and the People’s Republic of China Asian economies, the additional cost is less than $1 per ton of
(PRC) with 8.76%. CO2 emissions.

ADB’s regional members score generally low in relative CBAM Georgia comes out top in fertilizer exports to the EU, which
exposure indexes. Among them, India has the highest score, at constitute a significant 59.47% of its total fertilizer exports.
0.0436, followed by Georgia at 0.0097, Kazakhstan at 0.0078, Azerbaijan is close behind (58.65%); then Japan with 2.08%;

4
 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

Figure 3: Asian CBAM Exposure—Fertilizer

a. Exports of fertilizer to EU (% of total fertilizer exports to the world)

80.0000
70.0000
60.0000
50.0000
%

40.0000
30.0000
20.0000
10.0000
0.0000

PRC
Trinidad and Tobago

Taipei,China
United Kingdom

Viet Nam

South Africa

Oman
Colombia
Kazakhstan

United Arab Emirates

Canada
Tunisia

Chile

United States
Morocco

Saudi Arabia
Azerbaijan

Russian Federation

Japan
Mexico
Norway
Jordan

Australia
Ukraine

India
Georgia

Egypt, Arab Rep.

Iran, Islamic Rep.

Switzerland
Belarus

Türkiye
Israel

Mauritius
b. Relative CBAM Exposure Index
0.1000

0.0800

0.0600

0.0400

0.0200

-
Egypt, Arab Rep.
Russian Federation
Trinidad and Tobago

Azerbaijan

Saudi Arabia
Viet Nam
Belarus

Iran, Islamic Rep.

Taipei,China

Japan
Ukraine

Kazakhstan

South Africa

Canada
Georgia

Mauritius
United Arab Emirates

Colombia
Australia
Türkiye

United States
Mexico
Oman
PRC
India

Morocco
Tunisia
Jordan
Chile
Israel
(0.0200)

United Kingdom
(0.0400)

CBAM = Carbon Border Adjustment Mechanism, EU = European Union, PRC = People’s Republic of China.
Note: Orange bars represent ADB’s regional members.
Source: World Bank 2023.

Kazakhstan at 1.31%; India with 1.12%; PRC with 1.07%; Taipei,China Malaysia takes the lead in terms of its relative share of cement
with 0.80%; and Viet Nam at 0.60%. exports to the EU, making up 6.69% of its total global cement
exports. This is followed by Japan with 1.68%, Pakistan with 1.67%,
Georgia also claims the highest relative CBAM exposure index, the PRC with 1.08%, Viet Nam with 0.73%, and India with 0.61%.
with a score of 0.0814, followed by Azerbaijan at 0.0102, India
at 0.0010, Kazakhstan at 0.0014, the PRC with 0.0007, and Viet Malaysia also stands out in the relative CBAM exposure index with
Nam at 0.0002. In terms of fertilizer, Georgia faces the highest the score of 0.0256, followed by the PRC at 0.0034, Pakistan at
additional cost from CBAM implementation at $8.14 per ton of 0.0033, Viet Nam at 0.0026, and India at 0.0013. Malaysia faces
CO2 emissions.

5
ADB BRIEFS NO. 276

Figure 4: Asian CBAM Exposure—Cement

a. Exports of cement to EU (% of total cement exports)
100.0000
90.0000
80.0000
70.0000
60.0000
50.0000
%

40.0000
30.0000
20.0000
10.0000
0.0000
Ukraine

United Kingdom

Colombia

Norway

Morocco

Switzerland

Belarus

Albania

Tunisia

Malaysia

Egypt, Arab Rep.

Saudi Arabia

Japan

Pakistan

United States

PRC

Viet Nam

India
Türkiye
b. Relative CBAM Exposure Index
0.3500

0.3000

0.2500

0.2000

0.1500

0.1000

0.0500

-
PRC

Viet Nam
Tunisia

United States
Saudi Arabia

Türkiye
Japan
Ukraine

India

Egypt, Arab Rep.

Belarus

Pakistan
Malaysia

United Kingdom

(0.0500) Albania

Morocco
(0.1000)

Colombia
(0.1500)

CBAM = Carbon Border Adjustment Mechanism, EU = European Union, PRC = People’s Republic of China.
Note: Orange bars represent ADB’s regional members.
Source: World Bank 2023.

the highest additional cost from CBAM implementation at 0.0028, India at 0.0024, and Tajikistan at 0.0023. Although the
$2.56 per ton of CO2 emissions in cement. Philippines ranked fourth among the Asian exporters to the EU,
its relative CBAM exposure score comes out lowest, at –0.0005,
In the aluminum sector, Kazakhstan has the highest share of exports trailed by Hong Kong, China and the Republic of Korea with
to the EU, at 42.15%, followed by Azerbaijan with 29.30%. Behind –0.0002. Kazakhstan faces the highest additional cost from CBAM
them are the PRC with 13.20%, the Philippines with 9.28%, India with implementation in aluminum at $4.04 per ton of CO2 emissions.
9.08%, the Republic of Korea with 7.22%, and Malaysia with 6.55%.
Overall, the trade impact of the CBAM for Asian economies
Kazakhstan keeps the top position in the relative CBAM index, appears manageable given the region’s relatively low exposure.
with a score of 0.0404, followed by Azerbaijan at 0.0073, PRC at However, certain subregions or economies with stronger trade

6
 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

Figure 5: Asian CBAM Exposure—Aluminum

a. Exports of aluminum to EU (% of total aluminum exports to the world)
100.0000
90.0000
80.0000
70.0000
60.0000
%

50.0000
40.0000
30.0000
20.0000
10.0000
0.0000
Mozambique
Ghana
Cameroon
Norway
Morocco
Switzerland
Egypt, Arab Rep.
United Kingdom
Tunisia

Ukraine
Kazakhstan
Venezuela
Russian Federation
Jordan
Azerbaijan
United Arab Emirates
South Africa
Bahrain
Israel
PRC
Belarus
United States
Philippines
India

Saudi Arabia
Malaysia
Oman

Canada
Thailand
Tajikistan
New Zealand
Viet Nam
Japan
Mexico
Brazil
Taipei,China
Indonesia
Argentina
Qatar
Singapore
Colombia
Australia
Hong Kong, China
Türkiye

ROK
b. Relative CBAM Exposure Index
0.0700
0.0600
0.0500
0.0400
0.0300
0.0200
0.0100
-
Mozambique
Kazakhstan
Egypt, Arab Rep.
Venezuela
Cameroon
Ukraine
Azerbaijan
South Africa
Tunisia
Saudi Arabia
Bahrain
Oman
PRC
Russian Federation
United Arab Emirates
India
Tajikistan
Brazil
Indonesia
Türkiye
Israel
New Zealand
Argentina
Canada
United States
Belarus
Australia
Malaysia
Singapore
Japan
Viet Nam
Mexico
Taipei,China
Qatar
Colombia
Thailand
Republic of Korea
Hong Kong, China
Philippines
Jordan
(0.0100)

Morocco
United Kingdom
Ghana
CBAM = Carbon Border Adjustment Mechanism, EU = European Union, PRC = People’s Republic of China, ROK = Republic of Korea.
Note: Orange bars represent ADB’s regional members.
Source: World Bank 2023.

ties with Europe will be more affected. Some Asian economies are with the highest CBAM exposure index scores among identified
more exposed in that they trade more carbon-intensive goods with sectors, with iron and steel as its most exposed sector. More than
the EU (such as Central Asia, due mostly to significant exports of half of Georgian (59.47%) and Azerbaijan (58.65%) fertilizer exports
aluminum and fertilizer). Some economies have a high share of went to the EU. This makes Georgia subject to a relatively high score
carbon-intensive sectors in their economies, such as for iron and of 0.08114 and Azerbaijan a score of 0.0102 on CBAM exposure
steel or aluminum exports to the EU. index for fertilizers. For aluminum, 42.15% of Kazakhstan’s exports
of the metal went to the EU, making it the most exposed CBAM
Asia’s sector exposure to the CBAM varies among economies and aluminum exporter. On the other hand, negative CBAM exposure
could be significant for some. For example, Georgia’s fertilizer and scores were recorded for Cambodia and Sri Lanka for iron and steel,
iron and steel industries are substantially exposed and contributed to and for the Philippines and Thailand for aluminum, meaning their
the overall highest exposure. India also belongs to the top economies emission intensity is lower than the EU average.

7
ADB BRIEFS NO. 276

In addition, Asia’s industrial structure tends to be skewed toward For example, South Africa will be subject to a carbon border
higher CO2 emissions, which could make the region more likely in adjustment levy on its exports with a higher carbon content than
to be subjected to the CBAM in the future. There are also issues of the EU production. As it has a high carbon intensity of 7,801.33 tons
the capacity to trace and trade CO2 emissions. Some economies per $1 million worth of base metal production, the levy can be
(such as in the Pacific and South Asia) may struggle to adapt to estimated by multiplying the carbon intensity with the carbon price
CBAM implementation due to the absence of carbon emission- difference between the EU and South Africa. Using the EU carbon
reducing mechanisms and low statistical capacity to measure and price of $96.30, South Africa faces the highest rate of levy at 68.16%
report emissions. of its basic metal exports, followed by India at 38.80%, the Russian
Federation at 32.90%, and Viet Nam at 22.05% of their respective
base metal exports.3 These high rates reflect their relatively high
ECONOMIC IMPACTS carbon intensities and low domestic carbon prices.

Repercussions for Exports of ADB

PRC = People’s Regional
Republic Members
of China. Rest of the World indicates economies which do not have data on their carbon
PRC = People’s Republic of China. Rest of the World indicates economies which do not have data on their carbon
intensity and domestic carbon price. To them, the penalty rate of the least efficient EU 10% is applied as carbon
EU importers of CBAM-affected
intensity and products
intensity. domestic carbon have price.
to registerTo them, withthe penalty rate of the least efficient EU 10% is applied as carbon
PRC
their national authoritiesintensity.
Note:
intensityOrange a mechanism
bars
and domestic represent
carbon akin
ADB’s
price. to
To the
regional members.
them,
Figure 6: The Estimated Carbon Border
= People’s Republic of China. Rest of the World indicates economies which do not have data on their carbon
(through the penalty rate of the least efficient EU 10% is applied as carbon
Note: Orange bars represent ADB’s regional members.
ETS) and disclose emissions
Source:from
Source:
intensity.
OECDCBAM
OECD (n.d.); products,
World
(n.d.); World
Bank in line
(2023);
Bank (2023);
and
and with
ADB calculations.
ADB calculations. Adjustment Levy in % of Exports to the EU
Note: Orange bars represent ADB’s regional members.
exporters’ certifications. The OECD
data must be submitted byand 31 May in thelevy Basic Metals
Source: (n.d.); World Bank (2023); ADB
For example, South Africa will be subject to a carbon border adjustment calculations. on its exportsIndustry
with
of the following year after
For the
higher certification.
example,
carbon South
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thanwill thebe face
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38.80%, faces
priceRussia the
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[Link]
basicrespective
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at 32.90%, and of Viet Nam at 22.05% of their respective base
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followed prices. at 38.80%, Russia at 22.05%
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3 These price difference 40
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20.9
between carbon in thecarbonEU and the
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The CBAM will likely impact global trade patterns for affected a 30 industries.
22.0 20.7Some EU importers may
The CBAM will likely impact global trade patterns for affected 15.1importers
carbon price is often nonexistent. It aims to create
seek more competitive exporters fair conditions
given the change in prices 20 of exported Some
industries. 17.8 EU
goods. 15.4Others
13.0 12.0
14.9 may
may
shift 11.5 10.9
seek
The
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CBAM
their suppliers competitive
will
and to likely
to prevent exporters
impact
inside the global
“carbon
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patterns for in prices
affected of exported
industries. goods.
Some
the CBAM will have a global impact by design, the scale EU Others
importers may shift
12.6 may12.1
of
11.1 10.1
8.7 8.7
their
seek suppliers
more to inside
competitive the EU.
exporters While
given the
the CBAM
change willinhave 10 a global
prices of impact
exported by
goods. design,
Others themayscale of
shift
Given the gap in prevailing
its
its environmental
spillover
spillover
effects
effects regulation
around
around
the between
world
theWhile
worldthe
is less understood. The following analyses assess the
the EU and developingits
their suppliers
spillover
economies, effects toand
there
inside the EU.
identify countries inisthe
less
CBAM understood.
regionwillmost
have The
a global
0likely following
to be impact byanalyses
impacted. design, the assess
scalethe of
spillover effects andisaround
a concern
identify that
countries the
world inisthe
EU region most likely to following
be impacted.

Republic of Korea
South Africa
India
Russian Federation
Viet Nam
Taipei,China
PRC
Kazakhstan
Brazil
Thailand
Rest of the World

Türkiye
Ukraine
Indonesia
Tunisia
Colombia
Malaysia
Argentina
Australia
Japan
spillover effects the less understood. The analyses assess the
transfers pollutant-intensive
spillover production
effects and toidentify
economies with in laxer
C.2. Quantitative Analyses ofcountries
Economic the region
Impacts onmostDMCs: likely to be impacted.
Literature Review
environmental regulations,C.2. thus creatingAnalyses
Quantitative carbon leakage.
of Economic By taxing
Impacts on DMCs: Literature Review
the carbon-intensive goodsRecent
C.2. at the
studies
Quantitative border, the EU
adopted
Analyses ofinduces
quantitative
Economic non-EU
measures
Impacts on to DMCs:
examine the economic
Literature Review and environmental
Recentofstudies
impact border adopted quantitative
carbon adjustment measures
(BCA). These to show examine the economic
that a border adjustment andtaxenvironmental
could reduce
producers to adopt more stringent
impact of environmental
border carbon regulations,
adjustment (BCA). These show that a border adjustment taxenvironmental
could reduce
Recent
carbonmarket studies
leakages adopted quantitative
by between 5%and measures
andgaining to examine the economic
15%. BCAs would be most efficient and effective and were they
improving the EU producers’
carbon
impact leakages
of all
border competitiveness
by
carbonbetween 5% and 15%. BCAs would be most efficient and effective were they
to cover sectors andadjustment
include export (BCA). These
rebates show that
(Branger anda border
Quirionadjustment
2014). However, tax could reduce
concerns
public backing for carbon to
carbonpricing.
cover all Among
leakagessectors by its
and consequences,
betweeninclude 5%
have been that a BCA could unfairly impact developing export
and the
rebates
15%. BCAs (Branger
would beandmostQuirion 2014).
efficient and
countries’ Bank, However,
effective
exports concerns
were they
ADB =Asian Development EU =and tradeUnion,
European
CBAM might also prompt have
to EUbeen
cover trading that
all sectors
competitiveness partners
aand
because BCA todeveloping
impose
includecould exporta tax
unfairly
rebates
countries impact
(Branger
tend developing
to lack and countries’
Quirion
carbon 2014).
pricing exports
However,and
mechanisms and trade
concerns
have and Development,
competitiveness OECD = Organisation for Economic Co-operation
on carbon emissions—wherehave
differential thatbecause
the responsibilities
been revenue BCAdeveloping
a would go
forcould to national countries
unfairly
mitigating tend
impact
emissions to lack
developing
(Lowe
PRC
carbon
2021;
=
pricing2021).
countries’
UNCTAD
People’s Republic
mechanisms
of
exports
The trade
China.
andandeffects
have
trade
governments, not the EU. differential
competitiveness
of the CBAM responsibilities
willbecause for
on mitigating
dependdeveloping emissions
existingcountries
trade tend(Lowe
patterns, lack
to the 2021;
carbon
carbon UNCTAD
pricing2021).
intensity mechanismsThe trade
of production and effects
have
among
of the CBAM
differential
different will depend
responsibilities
countries, and the oncarbon
for existing
mitigatingtrade patterns,
emissions
policies of EU (Lowethe2021;
trading carbon
Notes: intensity
UNCTAD
partners. of production
2021). The
Quantitative trade among
analysis effects
shows
of the different countries, and the carbon policies of EU trading partners. Quantitative analysis shows
CBAM will depend 1. the
Rdistributional
estcarbon
of the World indicates economies that do not have data on their
Nevertheless, the carbonthat
that
tariff may carbon
a border
a border
increase
carbon
the on
adjustment
existing
cost
adjustment of cantrade
taxexported patterns,
create
tax policies
can create
adverse
adverse
intensity
distributional
effects
effects
offorproduction among
countries subject
for countries subject
different
to the countries,
measure and
(Branger the
andcarbon
Quirion 2014) of EU
and trading carbon
exacerbate intensity
partners.
regional and domestic
Quantitative
inequality carbon price.
analysis
(Böhringer et To
showsal. them, the penalty rate
goods. Figure 6 illustrates the
to the estimates
measure for the
(Branger carbon border
and Quirion 2014) and exacerbate
of regionaleffects
inequality
the least-efficient EUfor (Böhringer
10%countries as et al. intensity.
is applied subject
carbon
that
2012).a border carbon adjustment tax can create adverse distributional
adjustment levy in percentage
2012).
to of exports
the measure to theand
(Branger EU in the basic
Quirion 2. Orangeregional
2014) and exacerbate bars represent ADB’s(Böhringer
inequality regional members.
et al.
metal industry. 2012).
Sources: OECD n.d.; World Bank 2023; and ADB calculations.

3
3
The ratio is calculated as
The ratio is calculated as
3
The ratio is calculated as ×( − )
The ratio is calculated as
3 ×( − ) (1),
(1),
×( − )
where EEi denotes the embedded emissions in the exports to the EU in(1), the basic metal industry from country i, PEU
where EE
denotes thei denotes the embedded emissions in the exports to the EU in the basic metal industry from country i, PEU
carbon price in the EU in 2023, Pi denotes the carbon price in country i in 2023, and Exi denotes the exports
where EEi denotes the embedded
denotes
value
where to i emissions
thedenotes
EEthe carbon
EU fromthe in
price
countrythe
in the
embedded iexports
EU
in thein to the
2023,
basic
emissions PiEU
metal in the
denotes basic
the
industry.
in the tometal
carbon
exports industry
theprice
Because EU in from
in country i ineconomy
the basic andi,Ex
PEU
2023,industry
metal denotes
i denotes
from thethe
country i,carbon
PEU price in the EU in
exports
value price
2023, Pi denotes the carbon
denotes to the
the in EUeconomy
from
carbon country
price i inthe
in i in
EUthe
2023, basic
inand Eximetal
2023, Pdenotesindustry.
the Because
theexports valueintocountry
the EUi infrom economy i in the basic metal industry. Because
i denotes carbon price 2023, and Exi denotes the exports
value to the EU from country = i in the× basic metal industry. ℎBecause  ,
= × ℎ  ,
(1) can be simplified as = × ℎ  ,
(1) can be simplified as (1) can be simplified as
(1) can be simplified as ℎ  × ( − ).
ℎ  × ( − ).
The calculation used the latest available data (carbon intensity
The calculation used the latest available data in
ℎ 2018 by Organisation for Economic
(carbon intensity in 2018  Co-operation
by OECD statistics
× ( − and
). carbonandprices
Development
in 2023 statistics and carbon
Thethecalculation usedCarbon
the latest available data (carbon intensity in 2018 by OECD statistics and carbon prices in 2023
prices in 2023 by the World
by Bank,
WorldCarbon
Bank, Pricing Dashboard).
Pricing Dashboard).
by the World Bank, Carbon Pricing Dashboard).
The calculation used the latest available data (carbon intensity in 2018 by OECD statistics and carbon prices in 2023
by the World Bank, Carbon Pricing Dashboard).
8 INTERNAL. This informa on is accessible to ADB Management and staff. It may be shared outside ADB with appropriate
INTERNAL. This informa on is accessible to ADB Management and staff. It may be shared outside ADB with appropriate
permission.
[Link] informa on is accessible to ADB Management and staff. It may be shared outside ADB with appropriate
INTERNAL.
permission.
 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

The CBAM will likely impact global trade patterns for affected and analyzed impacts such as on macroeconomy, sectors, trade,
industries. Some EU importers may seek more competitive society, and environment.4 The model offers six options.
exporters given the change in prices of exported goods. For example, option 1 assumes an import carbon tax, calculated by
Others may shift their suppliers to inside the EU. While the CBAM a default value reflecting EU average, without free allocation under
will have a global impact by design, the scale of its spillover effects EU ETS. Among the others, option 4 is presented here as it is close
around the world is less understood. The following analyses assess to the real CBAM. Option 4 asks importers to surrender CBAM
the spillover effects and identify economies in the region most certificates in accordance with embedded emissions in imports,
likely to be impacted. allows gradual phase-out of free allocation under EU ETS,
and targets only basic materials and basic material products.5

Quantitative Analyses of Economic Impacts on Under option 4, the model estimates the macroeconomic impacts
Regional Members: Literature Review as is shown in Table 1. EU GDP will contract by 0.22% in 2030
Recent studies adopted quantitative measures to examine the with the decrease of consumption by 0.56%, compared with the
economic and environmental impacts of border carbon adjustment baseline scenario.6 In terms of impacts on EU’s imports, CBAM
(BCA). These show that a border adjustment tax could reduce sectors will see the decrease of imports from 4.41% (aluminum) to
carbon leakages by between 5% and 15%. BCAs would be most 26.41% (fertilizer) in 2030. On employment, CBAM sectors in EU
efficient and effective were they to cover all sectors and include other than cement will increase employment by 0.22% (iron and
export rebates (Branger and Quirion 2014). However, concerns steel) and 2.59% (fertilizer) in 2030. Carbon leakage is calculated
have been that a BCA could unfairly impact developing economies’ as the “increase” in emissions in non-EU regions in a specific sector
exports and trade competitiveness because developing economies divided by the “decrease” in emissions in the same sector in the
tend to lack carbon pricing mechanisms and have differential EU. Therefore, as non-EU regions decrease emissions, this ratio
responsibilities for mitigating emissions (Lowe 2021; UNCTAD 2021). goes down to a large negative value. The result shows that carbon
The trade effects of the CBAM will depend on existing trade patterns, leakage in fertilizer will be reduced significantly in 2030.
the carbon intensity of production among different economies, and
the carbon policies of EU trading partners. Quantitative analysis UNCTAD (2021) studies the potential effects of the CBAM on CO2
shows that a BCA tax can create adverse distributional effects for emissions, trade, income, and employment in the European Union
economies subject to the measure (Branger and Quirion 2014) and and its main trading partners, with particular focus on developing
exacerbate regional inequality (Böhringer et al. 2012). economies. Using a general equilibrium model, the study first
simulates the baseline scenario with domestic carbon prices fully
The European Commission published an impact assessment imposed in the EU. Then the study estimates the additional impact
report on 14 July 2021. The report employed a JRC-GEM-E3 model of the CBAM under EU carbon pricing of $88 per ton.

Table 1: Macroeconomic Impacts of the CBAM

Macroeconomy Imports Employment Carbon Leakage

(% change) (% change) (% change) (% change)
Impact on EU in 2030 -0.223 -11.98 0.22 -24
by option 4 (GDP) (Iron and Steel) (Iron and Steel) (Iron and Steel)
0.388 -15.12 -0.48 +7
(Investment) (Cement) (Cement) (Cement)
-0.558 -26.41 2.59 -208
(Consumption) (Fertilizer) (Fertilizer) (Fertilizer)
-4.41 0.89 -89
(Aluminum) (Aluminum) (Aluminum)
CBAM = Carbon Border Adjustment Mechanism, EU = European Union, GDP = gross domestic product.
Source: European Commission 2021a.

4
The Joint Research Centre (JRC)’s GEM-E3 is a recursive dynamic computable general equilibrium model. Variables are determined simultaneously through the
interactions between economy, energy system, and the environment.
5
Other options: Option 2 requires importers to surrender CBAM certificates, based on a default value reflecting EU average, without free allocation under EU
ETS. Option 3 operates in the same way as option 2, except the way to calculate the number of CBAM certificate to be surrendered. Option 3 asks actual
carbon intensity of the third economy producers, while option 2 refers to a default value. Option 5 basically follows option 3 but it expands the scope to the final
products. Option 6 is beyond the border control. It introduces an excise duty on domestic products and imported products.
6
The baseline refers to the EU Reference Scenario 2020 (‘REF’), the main elements of which are depicted in the Annex of the impact assessment for the revision
of EU ETS Directive. It assumes the continuation of free allocation of allowances to operators of installations from sectors and subsectors at a significant risk of
carbon leakage.

9
ADB BRIEFS NO. 276

The results (Table 2) suggest that the CBAM would help reduce The PRC’s chemical exports could fall by 1.4%. Chemical exports
CO2 emissions by 45 million metric tons (MtCO2) inside and in South Asia (other than India) were seen as decreasing by 0.9%,
outside the EU and decrease carbon leakage by 8.2%, from 15.1% and by 0.3% in East Asia (other than Japan and the PRC). For other
to 6.9%. This reduced leakage represents less than 0.2% of global sectors, the impact was considered more modest.
emissions. Yet the CBAM has particularly negative effects on trade
and income for developing economies as changes in international Separately, He, Zhai, and Ma (2022) conducted a quantitative
trade patterns favor economies with relatively carbon-efficient assessment of CBAM impacts using a dynamic CGE model. Table 4
production. The CBAM is seen as having the same effect as a presents economies/regions where GDP will be most negatively or
tariff increase on deepening intra-EU trade and diverting trade positively affected. Their findings showed economies that rely on
from carbon-intensive trading partners to regions that are either carbon-intensive exports to the EU are being disproportionately
more carbon efficient or exempt from the mechanism. Therefore, impacted, but overall, the impact is modest. For example, only a few
its introduction favors developed economies, which tend to have economies with high export dependence on the EU market such
less carbon-intensive production than developing economies. as the Russian Federation and Ukraine would see a decline of their
EU domestic carbon pricing of $88 per ton will reduce global GDP in 2030 by 0.2%. They are major exporters of iron and steel,
real income by $104.5 billion, mainly caused by income loss of nonferrous metal, electricity, and other carbon-intensive products to
$111.0 billion in EU. However, with the introduction of the CBAM, the EU, which would be hit directly by CBAM. The impact of CBAM
global real income falls by a further $8.3 billion , with developing on the PRC’s GDP is negative, but close to zero, given that its exports
regions incurring higher losses. of CBAM products to the EU amount to only 0.4% of its total exports.

Under the CBAM scenario, selected developed economies (mainly in

Table 2: Potential Effects of the CBAM on CO2 the EU) would experience welfare gains amounting to $11 billion while
Emissions, Carbon Leakage, and Income developing economies incur welfare losses amounting to $9 billion
compared with the baseline. Welfare losses in the PRC and India are
CO2 Emissions Carbon between $1 billion and $2 billion. For most developing economies,
(million metric Leakage Income welfare losses will be below $1 billion. Association of Southeast
Impacted Areas tons) (% change) ($ billion) Asian Nations (ASEAN) would incur $500 million in welfare losses,
European Union 13 5.929 while the Republic of Korea would gain about $300 million. The
results show that CBAM widens the GDP and welfare gap between
Other economies (59) (14.2)
developed and developing economies, worsening the income and
Total (45) (8.2%) (8.271) welfare distributions between rich and poor economies.
( ) = negative, CBAM = Carbon Border Adjustment Mechanism, EU = European
Union, CO2 = carbon dioxide. Eicke et al. (2021) expanded the risk scope to cover national
capacities to comply with the CBAM regulation. The study
Source: UNCTAD 2021.
introduced an index that captured not only trade exposure to the
EU, but also trade diversification proxied by the trade share of EITE
Chepeliev (2021) conducted a quantitative assessment using a goods, statistical capacity, the carbon intensity of energy systems,
computable general equilibrium model to estimate the impact of and a national target to reduce emissions.8 The index indicated an
the CBAM on EU trade partners.7 The assessment aggregated data economy’s relative risk by five quantiles.
into 20 economies/regions and 22 sectors and used economy-
specific CO2 emissions per unit of output by sector. Table 3 Table 5 shows the top 10 economies with a highest relative risk index.
presents economies/regions that will see the most impacts on per The index shows as the distance from the mean increases in the
capita income and Asian economies/regions. The study estimated positive direction, the economy becomes relatively vulnerable to
extremely limited negative impacts on the regional members CBAM. Mozambique takes the first place by a high margin. Bosnia
of ADB, while Ukraine’s iron and steel sector, and the Russian and Herzegovina and North Macedonia come to the second and third
Federation’s petroleum products sector were largely exposed place. Among ADB regional members, only Bhutan is included in the
to CBAM. For India, the impact on welfare was estimated at top 10 list.
$418.2 million and per capita income was forecasted to decrease
by 0.02%. For the PRC and Southeast Asia, per capita income Overall, quantitative analysis shows that while the CBAM may have
could decrease by 0.01%. Looking at the effect across sectors, a limited effect on emission reduction, its distributional effects
chemical products and iron and steel were seen as the most could be a concern. A range of factors need to be considered. First,
impacted. India’s iron and steel exports could decrease by 5.9%. geographical location is among the dominant factors. Studies on

7
The GTAP-E Model was used. The GTAP model is a multiregion, multisector, and computable general equilibrium model, with perfect competition and
constant returns to scale. The GTAP-E model is an expansion of the GTAP Model by incorporating carbon dioxide emissions.
8
The relative risk index is computed by sectoral_Exports_GDP + 0.25 × (RelativeExports_Sectoral + LowStatisticalCapacity + CarbonIntensity_
FinalEnergyConsumption + LackingEmissionReductionTargets). Every variable is standardized so that equal weights are imposed.

10
 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

Table 3: Impacts of the CBAM on EU Trading Partners

Impact on per
Capita Income Impact on Welfare Most Impacted Export Most Impacted Export
(% change) ($ million) (sector) (% change)
Ukraine -0.40 (451.3) Iron and Steel (5.1)
Rest of Europe -0.35 (341.2) Electricity (29.9)
Rest of Former Soviet Union -0.04 (228.4) Petroleum products (1.4)
MENA -0.03 (1163.1) Chemicals (0.9)
Sub-Saharan Africa -0.03 (434.9) Other metals (0.5)
India -0.02 (418.2) Iron and Steel (5.9)
PRC -0.01 (703.6) Chemicals (1.4)
Southeast Asia -0.01 (121.4) Chemicals (0.2)
Russian Federation 0.00 (34) Chemicals (4.3)
Japan 0.01 355 Chemicals (0.4)
Rest of South Asia 0.01 51.7 Chemicals (0.9)
Rest of East Asia 0.01 179.5 Chemicals (0.3)
( ) = negative, CBAM = Carbon Border Adjustment Mechanism, EU = European Union, MENA = Middle East and North Africa, PRC = People’s Republic of China.
Note: Asian Development Bank regional members are highlighted.
Source: Chepeliev 2021.

Table 4: Impacts of CBAM on GDP and Welfare Table 5: CBAM Risk Exposures—Relative Risk Index

Change in Relative Risk Index

Impact on GDP Welfare (Mean = -0.03, Standard Deviation = 1.07)
(% change, ($ billion, Mozambique 6.67
in 2030) in 2030)
Bosnia and Herzegovina 4.44
Ukraine (0.207) (0.7)
North Macedonia 2.77
Russian Federation (0.193) (4.7)
Ukraine 2.49
Kazakhstan (0.045) (0.2)
Jamaica 1.85
India (0.043) (1.8)
Serbia 1.47
MENA (0.036) (14.0)
Montenegro 1.42
ASEAN (0.013) (0.5)
Türkiye 0,92
People’s Republic of China (0.007) (1.1)
Bhutan 0.63
Japan (0.002) 0.2
Trinidad and Tobago 0.54
Republic of Korea 0.004 0.3
EU No Data 10.7 ADB = Asian Development Bank, CBAM = Carbon Border Adjustment
Mechanism.
( ) = negative, ASEAN = Association of Southeast Asian Nations, Note: ADB regional members are highlighted.
CBAM = Carbon Border Adjustment Mechanism, EU = European Union, Source: Eicke et al. 2021.
GDP = gross domestic product, MENA = Middle East and North Africa.
Note: Asian Development Bank regional members are highlighted.
Source: He, Zhai, and Ma 2022.

trade often use a gravity model, in which distance between an Second, the share of affected industries in the economy’s structure
exporter and an importer is usually included as a negative term for also matters. Even if the total CBAM impact may not be large,
bilateral trade. As can be seen, regional members geographically specific sectors may be hard hit. For example, Cambodian and
close to the EU tend to have strong trade ties with the EU. Those Indian iron and steel industries depend highly on trade with the
economies should foresee a reduction in trade through that route. EU. Local impacts on such sectors might be critical for economies
where these industries are economically important.

11
ADB BRIEFS NO. 276

Third, other factors such as an economy’s capacity and attitude to the settlement process cannot claim retrospective compensation;
climate agendas need to be considered. Eicke et al. (2021) find that it will simply urge future adjustment.
small developing economies have a higher relative risk than large
emerging economies. Larger economies may be less exposed to Controversy surrounding the CBAM’s compatibility with WTO
international markets because they have stronger internal markets, rules arises from the potential treatment of CBAM as a kind of
higher statistical capacity, and climate targets as a guide. carbon tax. The related questions are:
(i) Is CBAM a tax on products or on carbon? GATT Article
Prospects of CBAM and Issues II:2(a) allows import charges equivalent to domestic taxes on
The approved CBAM regulation targets six sectors. However, the a product or any inputs to a product. As far as CBAM targets
European Commission may consider expanding the coverage by either the product or the inputs, there are no contradictions.
2025, the end of the transition period. The regulation explicitly However, if CBAM is considered a tax on carbon, it is
raised the possible expanded scope to include: (i) embedded uncertain that carbon can be recognized as an input rather
indirect emissions of goods in Annex II, (ii) embedded emissions in than a by-product.
the transportation of those goods, (iii) other goods at risk of carbon (ii) Is CBAM consistent with the principle of national treatment?
leakage, and (iv) other input materials. GATT Article III:4 states that imported products shall
receive treatment no less favorable than domestic-like
Annex II of the mechanism lists iron and steel, aluminum, and products. If imported products are compared with domestic
chemicals as exemption from indirect emissions by article 7.1. products, unilateral tax applied only to imported products
Indirect emissions are defined as emissions from the production of cannot be admitted.
electricity that is consumed during production. Because indirect (iii) Does CBAM violate the rule of most favored nation
emissions are calculated by default value, economies producing (MFN) treatment? MFN treatment by GATT Article I:1 is
high carbon emissions from electricity generation would face more a core principle of GATT-WTO trade standards. If CBAM
of a burden, if embedded indirect emissions of goods listed in discriminates imports by economy-specific parameters to
Annex II were part of the expanded scope.9 measure embedded emissions (referred to as default values
and mark-up in CBAM regulation, Annex IV), that treatment
The quantity of embedded emissions in transport is usually can be rendered as arbitrary.
tied to the distance to EU importers. If embedded emissions in
transportation are adopted, regional members, especially in East Regardless of these and other points, GATT Article XX provides
Asia, Southeast Asia, and the Pacific, will lose competitiveness. some exceptions. Among them, Article XX: (g), “relating to the
conservation of exhaustible natural resource” can help justify the
The CBAM coverage could be expanded over time. The European CBAM as the EU implements the mechanism to preserve carbon
Commission’s assessment report has already considered an option concentration in the air, when current carbon concentration is
that would expand its scope to downstream sectors. Intermediate viewed as an exhaustible natural resource.
goods and manufactured goods could be included. However,
administrative practicality is in question as calculation methods will
become more complex.
POLICY IMPLICATIONS
Another sticking point is compatibility with World Trade
Organization (WTO) rules. If the CBAM is deemed incompatible, Quantitative analyses suggest that the value of the CBAM in terms
exporting economies can call on WTO’s dispute settlement of mitigating climate change is marginal. However, its impacts on
process to test that point. As the first step, concerned parties are trade patterns, competitiveness, and income distribution are far
expected to resolve the issue within 60 days. If they fail to settle, from negligible, especially for developing economies.
the case usually goes to a WTO panel that will submit a final report,
in principle, within 6 months. Both parties can appeal against the The CBAM is likely to affect regional members, some more than
final report. In such a case, the Dispute Settlement Body will make others. For example, Central Asia has a relatively large exposure to the
a final decision usually within a further 4 months. Generally, from EU in the trade of goods covered by the mechanism. At the sector
the initiation of a bilateral consultation, a total of 15 months may level, some Asian economies will feel a headwind in their exports,
elapse. Besides, if the CBAM turns out to breach WTO rules, the as the costs calculated by embedded emissions will be charged on
EU will have a further 15 months to adjust CBAM and follow the import prices from 2026. These include India in the iron and steel
dispute panel recommendation. That means EU trading partners sector, Georgia in fertilizer, and Kazakhstan in aluminum. Even though
could be exposed to the CBAM for 30 months. It should also be economies can successfully dispute the CBAM at the WTO, they
highlighted that even if the CBAM were to be judged in violation, cannot avoid its short-term impacts, generally for about 30 months.

9
Annex IV, 4.3. articulates “Default values for the indirect emissions embedded in a good produced in a third country shall be determined on a default value
calculated on the average, of either the emission factor of the Union electricity grid, the emission factor of the country-of-origin electricity grid or the CO2
emission factor of price-setting sources in the country of origin, of the electricity used for the production of that good.”

12
 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

These quantitative analyses also indicate that the CBAM would Technical and financial support can increase the productive
widen the welfare gap between developing and developed capacity of other sectors and so reduce reliance on EITE sectors.
economies under the business-as-usual scenario. In most cases, Asian economies also need to seek more technical assistance and
developed economies fare better since their production practices capacity building through international cooperation to help them
tend to be less carbon-intensive. From a development perspective, implement carbon pricing and to increase their statistical capacity.
effective reduction of global emissions will require more efficient Earlier studies show that an economy’s capacity to adjust to CBAM
production and transport processes in regional members. The implementation may significantly skew the economic impacts
EU might consider utilizing part of the revenue generated by of the CBAM. Smaller and less developed economies are highly
the CBAM to accelerate the diffusion and uptake of cleaner susceptible to risks that may come from a lack of capacity to track
production technologies in CBAM-targeted sectors of developing trade in carbon-intensive products. ADB can facilitate capacity
economies. building and knowledge-sharing activities among its regional
members to support their adjustments to CBAM implementation
The CBAM may have more systemic implications, despite having and mitigate the impact of the CBAM on their economies.
relatively small effects on emissions and on most trade flows. Some
economies may consider introducing or expanding broad-based Fourth, and over the long term, border carbon adjustments may
domestic carbon pricing programs. Such programs would still become more common as a mechanism for reducing carbon
drive up business costs, but the collected taxes would accrue to leakage. Asian economies need to substantially strengthen their
governments domestically and could be used to support exporters energy efficiencies and reduce emissions through energy transition
seeking to reduce carbon intensity in ways compliant with WTO and upgrading of production technology. Many Asian economies
rules. Effective carbon pricing can also catalyze private sector with high exposures of trade in carbon-intensive sectors should
investment in green sector and low-carbon technology to spur enhance their efforts to decarbonize the sectors. For example,
innovations. Asia’s steel producers would face steep costs due to the CBAM
implementation without scaling up investment in low-carbon
production and energy transition. Public policy can play a catalytic
What Can Asian Economies Do? role by setting clear and ambitious emission reduction and
First, Asian policy makers may reflect on how their existing renewable energy targets, while mobilizing public and private
domestic carbon policy frameworks might mitigate the impact of investment in low carbon technology and energy transition.
the CBAM on their economies. The region’s carbon markets are
still being developed (Duggal 2023). Currently, Asia and the Pacific Finally, stronger regional cooperation is needed to generate timely
economies have implemented six direct carbon pricing initiatives. and collective responses to the CBAM, to build a stronger regional
Japan and Singapore employ a carbon tax while New Zealand, voice in negotiating how the revenues it will generate are used, to
Kazakhstan, the Republic of Korea, and the PRC have each claim technical assistance and capacity building, and to expand
launched an ETS. Viet Nam and Thailand have also taken legal and integrate regional carbon markets.
and administrative steps to implement a carbon price. Pakistan,
the Philippines, and Taipei,China are also considering adopting
domestic ETS. Although a regional carbon trading hub is being set
up in Singapore, it will take time for economies in the region to fully REFERENCES
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to upgrade the value added of their exports. For instance, steel
embedded in car parts exported to the EU is not subject to the levy Branger, F., and P. Quirion. 2014. Would Border Carbon Adjustments
(although this could soon change). An increase in carbon price Prevent Carbon Leakage and Heavy Industry Competitiveness
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Trading Partners. Energy Research Letters. 2 (1).
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International Trade Centre. 2023. Trade Map.

[Link]

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 European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia

APPENDIX
Aggregate CBAM Exposure Index

CBAM Products Exports CBAM Products Aggregate

to the EU (% of total CBAM Exports to the EU Relative CBAM Most Exposed
Economy products exports to world) (% of GDP) Exposure Index CBAM Products
1 Albania 58.7020 0.7323 (0.0250) Cement
2 Argentina 2.1749 0.0083 0.0011 Iron and steel
3 Australia 1.4019 0.0043 0.0000 Cement
4 Azerbaijan 15.9149 0.0924 0.0011 Fertilizer
5 Bahrain 14.1302 1.1716 0.0002 Cement
6 Belarus 50.1660 1.3580 0.0302 Cement
7 Brazil 11.4577 0.0530 0.0024 Iron and steel
8 Cambodia 19.1807 0.0204 (0.0010) Iron and steel
9 Cameroon 93.3836 0.2145 0.0000 Cement
10 Canada 2.6011 0.0244 0.0001 Iron and steel
11 Chile 21.7032 0.0656 (0.0045) Fertilizer
12 China, People’s Republic of 8.5963 0.0494 0.0024 Cement
13 Colombia 10.3755 0.0097 (0.0116) Cement
14 Costa Rica 0.9456 0.0041 0.0001 Iron and steel
15 Egypt, Arab Rep. 37.8454 0.3470 0.0196 Fertilizer
16 Georgia 34.8009 0.2878 0.0464 Fertilizer
17 Ghana 35.3901 0.1500 (0.0000) Aluminum
18 Hong Kong, China 4.8635 0.0067 0.0033 Iron and steel
19 India 18.9232 0.1018 0.0303 Iron and steel
20 Indonesia 6.2187 0.0418 0.0017 Iron and steel
21 Iran, Islamic Rep. 5.2323 0.0361 0.0044 Iron and steel
22 Israel 31.0679 0.0325 (0.0047) Cement
23 Japan 1.9834 0.0120 (0.0001) Cement
24 Jordan 24.6086 0.1802 (0.0050) Fertilizer
25 Kazakhstan 13.7433 0.1758 0.0051 Aluminum
26 Korea, Republic of 10.0530 0.1832 0.0002 Iron and steel
27 Kuwait 3.3015 0.0014 0.0004 Cement
28 Malaysia 5.5300 0.1105 0.0007 Cement
29 Mauritius 1.6510 0.0137 (0.0007) Cement
30 Mexico 1.8587 0.0092 0.0004 Fertilizer
31 Morocco 15.0500 0.3316 (0.0029) Cement
32 Mozambique 73.7338 6.9223 0.0001 Aluminum
33 New Zealand 4.5237 0.0173 0.0001 Fertilizer
34 Oman 2.7560 0.1135 0.0016 Aluminum
35 Pakistan 1.2260 0.0016 0.0015 Cement
36 Peru 1.1031 0.0013 0.0009 Iron and steel
continued on next page

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ADB BRIEFS NO. 276

Appendix table: continued

CBAM Products Exports CBAM Products Aggregate

to the EU (% of total CBAM Exports to the EU Relative CBAM Most Exposed
Economy products exports to world) (% of GDP) Exposure Index CBAM Products
37 Philippines 1.5628 0.0008 0.0002 Cement
38 Qatar 0.7839 0.0171 0.0000 Cement
39 Russian Federation 31.4333 0.6627 0.0194 Electricity
40 Saudi Arabia 2.4186 0.0173 0.0006 Cement
41 Senegal 1.0846 0.0097 (0.0001) Iron and steel
42 Singapore 1.0425 0.0042 0.0001 Iron and steel
43 South Africa 16.5159 0.2007 0.0069 Iron and steel
44 Sri Lanka 2.8027 0.0013 (0.0001) Cement
45 Taipei,China 12.1654 0.2184 (0.0006) Iron and steel
46 Tajikistan 17.7351 0.0755 0.0001 Aluminum
47 Thailand 3.9332 0.0268 0.0004 Iron and steel
48 Trinidad and Tobago 11.5088 0.9607 0.0300 Fertilizer
49 Tunisia 43.3304 0.4721 0.0042 Cement
50 Türkiye 43.4520 0.8075 0.0049 Electricity
51 Ukraine 37.1054 2.3581 0.0525 Cement
52 United Arab Emirates 14.4872 0.3458 0.0003 Aluminum
53 United Kingdom 68.9329 0.1964 (0.0015) Cement
54 United States 9.7267 0.0080 0.0003 Cement
55 Venezuela 44.5336 0.1655 0.0114 Iron and steel
56 Viet Nam 5.5330 0.1149 0.0043 Iron and steel
57 Zimbabwe 86.9625 0.4254 0.0873 Iron and steel
( ) = negative, CBAM = Carbon Border Adjustment Mechanism, EU = European Union, GDP = gross domestic product.
Note: Asian Development Bank regional members are highlighted (accessed July 2023).
Source: World Bank 2023.

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