As countries adopt ambitious climate policies domestically, they also risk carbon leakage. To minimise such risk, a number of countries, including Canada, Japan, the United Kingdom, the United States, and the European Union (EU) are contemplating the adoption of carbon border adjustment mechanisms (CBAMs). However, given their potential impacts, developing countries are objecting to the implementation of CBAMs. This Policy Brief explores the trade impacts should CBAMs be adopted by Western Europe and the US based on the EU’s proposed model where six sectors are to be initially targeted. Using a computable general equilibrium model, the paper simulates the impacts of CBAMs on trade, welfare, and carbon dioxide (CO2 ) emissions following a US$100/tCO2e carbon tax. The brief outlines a series of policy recommendations for the G20 to prepare for and adjust to CBAMs.
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