What are the effects of a European Carbon Border Adjustment Mechanism on the Dutch economic sectors
The European Commission has proposed a carbon border adjustment mechanism (CBAM) as part of the European Green Deal. The purpose of the CBAM is two-fold: to limit carbon leakage and to incentivise non-EU countries to take mitigation action. By imposing a carbon price on extra-EU imported products, CBAM aims to level the playing field for intra-EU and extra-EU produced products. This could lead to an increase in prices in the intra-EU market, with downstream producers facing higher costs for their purchased materials and fuels, resulting in an increased risk of carbon leakage downstream. At the same time, prices of intra-EU produced products could also increase due to the producers under the EU Emissions Trading System (EU ETS) could now pass on their carbon costs where they could not do that before CBAM without a loss of competitiveness.
The Dutch government would like to know which Dutch economic sectors would be most affected and in what way. To support the Ministry of Finance in answering this question, Trinomics employed a mix of quantitative and qualitative methods for assessing the impact of CBAM. A trade analysis is used to determine the direct CBAM costs on extra-EU imported products. This is followed by an input-output analysis, where we took into account different cost pass-through rates per sector in calculating the impacts that CBAM could have downstream to the different sectors. These were subsequently complemented with a trade intensity analysis of the Dutch sectors most affected by CBAM to assess their carbon leakage risk and potential changes to production and emissions. The main conclusion of the study was that Dutch industries with significant exports to markets outside of the EU could face an increased risk of carbon leakage due to the phase out of free allowances accompanying the introduction of CBAM.
The key findings of the project are:
- The introduction of CBAM primarily increases the risk of carbon leakage through the higher costs for industries due to the phase out of free allowances rather than costs directly imposed by CBAM.
- The refinery and basic metal industries and several subsectors of the chemical industry face the highest increase in risk of carbon leakage, which is related to the export