The Impact of the EU Carbon Border Adjustment Mechanism on China’s Exports to the EU

Abstract

The EU Carbon Border Adjustment Mechanism (CBAM), which is regarded as the EU’s key policy tool to address carbon leakage, might have a non-negligible impact on China’s exports, as China is an important trading partner for the EU’s carbon-intensive products. This paper uses the GTAP-E model to simulate the impact of the EU CBAM on China’s exports to the EU from four aspects, export price, trade structure, trade value and terms of trade, by setting up multiple scenarios. The results show that the EU CBAM reduces the export prices of China’s taxed sectors to the EU, and that the export prices of other sectors show the same change characteristics. The export volume of China’s taxed sectors decreases differently with the export transfer effect and export inhibition effect. In terms of trade value, the EU carbon tariffs not only reduce China’s export value but also lead to a reduction in EU exports. The implementation of the EU CBAM improves the terms of trade of the EU and worsens the terms of trade of China. An expansion of the scope of taxation and a change in the calculation method of carbon emissions would aggravate the change in the terms of trade. The results suggest that feasible measures should be taken to strengthen international cooperation, promote the construction of a unified national carbon market and export diversification, and establish a firm carbon emission accounting system in order to mitigate the negative impact of the EU CBAM.

1. Introduction

In order to mitigate carbon leakage in international trade and improve the competitiveness of products within the EU, the EU proposed for the first time the EU Carbon Border Adjustment Mechanism (CBAM) in December 2019 in the European Green Deal. This mechanism would tax imports of specific carbon-intensive products based on the product’s carbon emissions and the EU carbon market price, which could eliminate the cost difference in carbon emission reduction between firms within the EU and foreign firms [1]. On 16 May 2023, the EU CBAM Act was officially published in the Official Journal of the European Union, indicating that the EU CBAM had completed all legislative procedures; it entered into force on 17 May. According to the content of the act, the EU will formally impose tariffs on 1 January 2026, after a three-year transition period. Although the EU CBAM is still in transition, it will change the global trade division to a certain extent in the future, especially for countries with a high proportion of carbon-intensive exports and close trade with the EU [2].

China, which is both the EU’s major trading partner and the largest source of carbon emissions embodied in EU import trade, will undoubtedly be affected by the EU CBAM. China’s exports to the EU have been growing over the past 20 years, from USD 44.97 billion to USD 56.197 billion (see Figure 1 for details). During the period 2002–2022, China’s exports to the EU accounted for about 15% of China’s total exports. Statistics show that, in 2022, the share of China’s exports of high-carbon leakage products (that is, products included in the EU’s carbon leakage list) to the EU was 31.14%. In addition, some steel and aluminum are exported from China to other countries as intermediate products, which are processed and re-exported to the EU [1]. Given the large volume of trade between China and the EU and the carbon-intensive characteristics of China’s exports [3,4], the EU’s carbon tariffs will inevitably have a negative impact on China’s export of carbon-intensive products and their related sectors. Therefore, before the tariffs are formally imposed, it is of great significance for the Chinese government to formulate targeted measures to mitigate the impact of the CBAM on China’s foreign trade by assessing the possible impact of the EU CBAM on China’s exports to the EU.

Since the CBAM was proposed, its rationality has caused a lot of controversy [5,6,7], and a growing number of studies have begun to focus on the impact of the CBAM. A widely discussed issue is that, by imposing additional prices on imports, developed countries might increase the competitiveness of domestic products at the expense of imports and transfer part of the costs of emission reductions to trading partners [8]. This makes the CBAM suspected to be a green trade protectionist tool [9], and considered to violate the principle of common but differentiated responsibilities (CBDR) in the United Nations Framework Convention on Climate Change [10,11]. This argument is often put forward in developing countries [12], because they are export-oriented and production technologies are usually carbon-intensive [13].

Relevant research on the impact of the CBAM focuses on discussing the impact of the CBAM implementation on the economy and trade. Research on specific countries shows that the implementation of carbon-based Border-Tax Adjustments (BTAs) in the United States negatively affects China’s exports and reduces domestic income [14]. Although Gros [15] found that the imposition of carbon tariffs could increase global welfare, more results from global dimensions suggest that the economic and trade losses caused by the CBAM will be greater than the benefits. Burniaux et al. [16] used a global general equilibrium model to show that, although the economic effects of BTAs vary due to the way they are implemented, their welfare effects are generally negative at the world level. Using a GTAP-E model, Septiyas and Widodo [17] also confirmed that if China imposes tariffs on coal imports to the United States, there would be a global trade offset and a trade depression.

As one of the EU’s core policy tools to address climate change, the EU CBAM has become a hot topic in academia recently. Carbon tariffs on imports from EU trading partners might bring tangible results in avoiding carbon leakage, as well as a significant impact on trade [8,18,19]. By simulating changes in the overall exports of EU member states and non-EU member states to the EU, Zhong and Pei [11] found that after the implementation of the EU CBAM, output in the EU would increase by 0.38%, while output in the rest of the world would decrease by 0.1%. Due to the degree of exposure of countries exporting CBAM products to the EU varying substantially, at least 2% of exports and 1% of production in many developing countries would be affected by the EU CBAM [20]. In relative terms, Russia, Ukraine and China would suffer large welfare losses [21]. A study of China’s agricultural trade by Yang et al. [22] found that the EU’s carbon tariffs would result in a reduction of about 0.06% in the production of most of China’s taxed agricultural commodities, while only petroleum, fruit and vegetables, and dairy products would not be affected. Lin and Zhao [1] used steel rebar and aluminum futures data from the Shanghai Futures Exchange (SHFE) and examined the impact of the EU CBAM on China’s steel rebar and aluminum futures contracts. They found that both steel rebar and aluminum futures in China would be negatively affected by the CBAM, and aluminum is more sensitive due to its high export intensity and carbon emissions.

Although the above studies make some contributions to analyzing the impact of the EU CBAM on China, it still needs further exploration. First, early studies mainly investigated the global or country-specific impacts of similar carbon tariff mechanisms, such as the BTAs implemented by the United States. While most of the recent research has begun to focus on the impacts of the EU CBAM, little of this literature pays attention to China, which will be the main relevant country for impacts of the EU CBAM as it is an important trading partner for EU carbon-intensive product imports. Second, the EU CBAM currently applies to six sectors, cement, electricity, fertilizers, steel, aluminum and hydrogen, but there is still potential to expand the coverage of sectors in the future. For this reason, it is necessary to further consider the impact of the EU CBAM under different sector coverage scenarios.

To solve these problems, this paper analyzes the impact of the EU CBAM on China’s exports to the EU based on the GTAP-E model. First of all, this paper uses the recursive dynamic method to update the GTAP-E database to 2026, and sets up simulation scenarios according to different sector coverage and carbon emission calculations. Then, the impact of the EU CBAM on China’s exports to the EU under different scenarios is simulated from four perspectives: export price, trade structure, trade value and terms of trade.

This paper expands existing studies in the following aspects. First, this paper innovatively quantifies the impact of the EU CBAM on China’s exports to the EU. Previous studies richly discuss the EU CBAM or other similar mechanisms through the equilibrium model, but ignore the possible impact on trade between China and the EU. The results of this paper can not only provide empirical evidence for the Chinese government to better respond to the impacts of the EU CBAM, but also provide an effective reference for other developing countries trading with the EU. Second, simulating the impact of different sector coverage and carbon emission calculations could provide a more comprehensive analysis for assessing the impact of the EU CBAM. This is crucial to reduce uncertainty in the simulation results.

The rest of the paper is organized as follows. Section 2 describes the legislative process and content of the EU CBAM. Section 3 details the model, data and scenario settings for simulating the impact of the EU CBAM on China’s exports to the EU. Simulation results under different scenarios are presented in Section 4. Section 5 summarizes the conclusions and presents policy implications.

2. The Legislative Processes and Contents of the EU CBAM

Carbon leakage occurs when carbon-intensive firms try to reduce their carbon costs by moving production to countries with less stringent environmental regulations, because carbon emissions of these countries offset the mitigation effect of strict environmental regulations [23,24,25]. The EU CBAM is recognized as a policy measure to address carbon leakage, and the EU CBAM could ensure that the EU’s carbon-intensive firms are competitive against foreign firms [26,27].

Specifically, the EU CBAM was first proposed in December 2019 in the European Green Deal. In this deal, the EU Commission proposed to achieve climate goals by expanding the coverage of the carbon market, accelerating the rate of free quota degradation and introducing the CBAM. In March 2020, the EU Commission published an assessment report on the initial impacts of the EU CBAM, which identifies the elements that need to be taken into account in the design of the EU CBAM as well as the framework for impact assessment. The EU Commission also publicly solicited comments in the following months. The EU CBAM was included in the 2021 legislative proposal in September 2020 and passed a vote in the European Parliament in March 2021. The EU Commission formally submitted the EU CBAM proposal in July 2021, which meant that this proposal would enter the legislative process. On 25 April 2023, the EU Council voted to approve the EU CBAM proposal, which entered into force 20 days later. The EU CBAM Act thus successfully completed all the legislative processes and became part of EU law. The main events in the EU CBAM legislative process are shown in

Table 1. The main events in the EU CBAM legislative process.

Date	Main Events
December 2019	European Green Deal regarded the EU CBAM as a central part of future climate action.
March 2020	The EU Commission submitted the EU CBAM impact assessment report.
July 2020	Public consultation.
September 2020	The President of the EU Commission announced the inclusion of the EU CBAM in the legislative program for 2021.
March 2021	The European Parliament supported the establishment of the EU CBAM.
July 2021	The EU Commission formally submitted the EU CBAM proposal.
March 2022	The EU Commission, the European Parliament and the EU Council held tentative negotiations on the EU CBAM.
March 2023	The EU Council voted on the proposal to establish the EU CBAM.
May 2023	The EU CBAM entered into force and was launched on 1 October 2023, and officially implemented in 2026

Source: Legislative Train Schedule, European Parliament.

.

According to the act, the content of the EU CBAM can be summarized as follows. The EU CBAM initially covers products in six sectors: steel, aluminum, cement, fertilizers, electricity and hydrogen. The specific scope of the levy is the direct emissions of these products as well as embodied emissions other than steel and aluminum (where direct emissions refer to carbon emissions during production that are directly controlled by the producer, and embodied emissions also include carbon emissions from electricity consumption, heating and cooling). The transition period for the EU CBAM is from 1 October 2023 to 31 December 2025, during which time firms need only to fulfill the reporting obligations; that is, they need to submit data on the quantity of direct carbon emissions and embodied carbon emissions of imported products every year without paying fees. On 1 January 2026, the EU CBAM will be formally implemented and will be fully implemented by 2034. After that, firms will not only have to report the annual carbon emission data of imported products, but will also have to pay the corresponding carbon emission fees in the form of purchasing CBAM vouchers. The fees to be paid depend on the product’s carbon emissions after deducting free quotas, the carbon price of the exporter and the price of the EU CBAM voucher. It is worth noting that the price of the EU CBAM voucher is calculated by the EU Commission based on the average closing price of carbon quotas in the EU Emissions Trading System (EU-ETS). Thus, the EU CBAM is also seen as a supplement to the EU-ETS [1]. With the expansion of coverage, the EU CBAM would capture more than 50% of the carbon emissions of the EU-ETS.

3. Model Structure and Scenario Design

3.1. Model Structure

The Global Trade Analysis Project (GTAP) model is a multi-regional, multi-sectoral Computable General Equilibrium (CGE) model. It uses the global closure method of macroeconomics to solve nonlinear equations through linear programming [28], and is widely used in policy effect analyses [29,30,31,32,33]. The GTAP-E model used in this paper is based on the standard GTAP model [34], and its internal structure is shown in Figure 2.

The GTAP-E model is basically the same as the GTAP model in terms of theoretical assumptions and model structure. They both link the modules of production, consumption and government expenditures of each country through international trade, forming a comprehensive model. Unlike the standard GTAP model, the GTAP-E model adds energy (coal, oil, gas, petroleum products and electricity) as a new production factor to the production module in combination with the original five production factors (land, capital, skilled labor, unskilled labor and natural resources), and uses the constant elasticity of substitution (CES) production function to reflect the price changes caused by carbon tax. The GTAP-E model also adds a carbon emissions module and a carbon emissions trading module, and introduces the carbon tax variable, which is regarded as an important application of the GTAP model in the field of energy and the environment [35,36,37].

Specifically, the production module is nested with six layers of production functions, as shown in Figure 3. The top layer uses the Leontief production function to characterize the total output through value-added energy and intermediate inputs. The second layer decomposes the top-layer factors into their respective parts. Using the CES production function, the left side is decomposed into capital–energy, natural resources, land and labor; the right side is composed of single-nested intermediates under the Armington assumption. The third layer decomposes capital–energy into capital and energy, and the two factors can be substituted by each other. For example, when energy prices rise, firms will choose more energy products to substitute for capital. Each intermediate good is divided into domestic and imported sources. Energy is decomposed into electric energy (ELE) and non-electric energy (Non-ELE) in the fourth layer. The former is divided into different sources at the next level, and the latter is decomposed into coal and non-coal. At the sixth layer, coal could also be decomposed into domestic and imported sources, and non-coal is decomposed into gas, oil and petroleum products. Similarly, petroleum products could also be decomposed into different sources.

In the carbon emission module, the GTAP-E database adds carbon emission data for each country (region). It is assumed that carbon emissions are proportional to the use of emission sources. In the carbon emission trading module, in order to reflect the carbon emission trading between countries (regions), the GTAP-E model divides all countries (regions) in the world into two blocks. One block represents the existence of carbon emission trading between countries (regions); the other block represents no carbon emission trading. In the presence of carbon emission trading, the carbon emission quotas of each country (region) could be different from the actual carbon emissions, but the carbon emission quotas and total carbon emissions of the group of countries (regions) must be the same. In addition, the GTAP-E model also adds a carbon quota purchase variable to ensure that carbon emission restrictions could be imposed or relaxed during policy simulation.

3.2. Data Source and Processing

The data used for the modeling in this paper are drawn from the GTAP-E 10 database covering 141 countries (regions) and 65 sectors, with a base year of 2014. As previously analyzed, the coverage of the EU CBAM varies across countries (regions) and sectors, making it necessary to group countries (regions) and sectors.

At the national level, the 27 EU member states and the EU-ETS countries (regions) other than the EU member states (Liechtenstein, Norway, Switzerland) are divided into two groups due to the fact that they are classified as exempted countries (regions) by the EU CBAM [38]. Developing countries dominated by carbon-intensive product exports and countries (regions) with high energy consumption are more vulnerable to the impact of the EU CBAM and are treated as separate groups. These countries (regions) include China (CHN), the United States (USA), India (IND), ASEAN (ASE), South Africa (ZAF), Brazil (BRA) and Russia (RUS). The rest of the countries and regions in the world are combined into a new group. At the sectorial level, the original 65 sectors are reorganized into 17 sectors. Metal smelting (MET), fabricated metal products (FAB), chemical products (CHE), non-metallic products (NMM) and electricity (ELE) are grouped separately, depending on whether they are included in the sectors explicitly covered by the EU CBAM. For sectors that are not explicitly taxed but are classified by the EU-ETS as having a higher risk of carbon leakage, they are also grouped separately, including food products (FOO), textiles and apparels (TEX), paper and wood products (PAP), basic pharmaceutical products (PHA), rubber and plastic products (RUP), coal (COA) and crude oil (CRU). The GTAP-E model expands the energy module, so that the energy sectors such as coal (COA), natural gas extraction (NAT), petroleum products (PET), crude oil (CRU) and electricity (ELE) are also divided into separate groups. The rest of the sectors are combined into agriculture, forestry, animal husbandry and fishery (AFF), other manufacturing sectors (OMS) and other service sectors (OSS). Specific country (region) and sector groupings are shown in

Table 2. Classification of countries (regions).

Number	New Subtotal Countries (Regions)	Original 141 GTAP Countries (Regions)
1	CHN	China
2	EU 27	EU 27
3	EFTA	Liechtenstein, Norway, Switzerland
4	USA	United States
5	IND	India
6	RUS	Russia
7	BRA	Brazil
8	ASE	ASEAN
9	ZAF	South Africa
10	ROW	Other countries (regions) not included in the above categories

Data source: Summarized according to GTAP database (GTAPagg).

and

Table 3. Classification of industrial sectors.

Type	Number	Abbreviation	New Subtotal Industrial Sectors	Original Number in 65 GTAP Industrial Sectors
EU CBAM-covered sectors	1	MET	Metal smelting	37
	2	FAB	Fabricated metal products	38–39
	3	CHE	Chemical products	33
	4	NMM	Non-metallic mineral products	18, 36
	5	ELE	Electricity	46
High carbon leakage risk sectors	6	FOO	Food products	19–26
	7	TEX	Textiles and apparels	27–29
	8	PAP	Paper and wood products	30–31
	9	PHA	Basic pharmaceutical products	34
	10	RUP	Rubber and plastic products	35
	11	COA	Coal mining	15
	12	CRU	Crude oil	16
Other sectors	13	NAT	Natural gas extraction	17, 47
	14	PET	Petroleum products	32
	15	AFF	Agriculture, forestry, animal husbandry and fishery	1–14
	16	OMS	Other manufacturing sectors	40–45
	17	OSS	Other service sectors	48–65

Data source: Summarized according to GTAP database (GTAPagg).

.

With the above adjustments, data for 10 groups of countries (regions) and 17 sectors in 2014 are available. In order to more realistically reflect the impact of the EU CBAM, it is necessary to update the entire GTAP-E database to 2026. Using the recursive dynamic method [39,40], we predict the five exogenous variables of GDP, capital, population, unskilled labor and skilled labor to update the entire database based on databases of the International Monetary Fund (IMF), the French Institute for Research in the field of international economics (CEPII) and the World Bank. The updated database forms a baseline simulation scenario for 2026, simulating the economic and trade levels of different countries (regions) under existing climate actions before the formal implementation of the EU CBAM.

3.3. Scenario Design

In order to simulate the impact of the EU CBAM on China’s exports to the EU, four simulation scenarios are designed.

S1: The EU imposes carbon tariffs on China based on direct carbon emissions, with the EU CBAM-covered sectors as the scope of taxation.

S2: The EU imposes carbon tariffs on China based on direct carbon emissions, with the EU CBAM-covered sectors and high carbon leakage risk sectors as the scope of taxation.

S3: The EU imposes carbon tariffs on China based on embodied carbon emissions, with the EU CBAM-covered sectors as the scope of taxation.

S4: The EU imposes carbon tariffs on China based on embodied carbon emissions, with the EU CBAM-covered sectors and high carbon leakage risk sectors as the scope of taxation.

In the above four scenarios, we also consider three levels of the carbon price, USD 50/tCO₂, USD 80/tCO₂ and USD 120/tCO₂. Of these, USD 50/tCO₂ is the average price of the EU-ETS in the second half of 2021, which is widely used in existing studies [11,41]. USD 80/tCO₂ comes from the annual average price of the EU-ETS in 2022. On 21 February 2023, the carbon price of the EU-ETS exceeded USD 105/tCO₂ for the first time, and higher standards are still possible in the future. For this reason, we also consider the level of USD 120/tCO₂. The details of the scenarios are listed in

Table 4. Content of simulation scenarios for the EU CBAM.

Scenario		Taxation Sector	Carbon Emission Calculation	Carbon Price
S1	S1−a	EU CBAM-covered sectors	Direct carbon emissions	USD 50/tCO2
	S1−b			USD 80/tCO2
	S1−c			USD 120/tCO2
S2	S2−a	EU CBAM-covered sectors and high carbon leakage risk sectors	Direct carbon emissions	USD 50/tCO2
	S2−b			USD 80/tCO2
	S2−c			USD 120/tCO2
S3	S3−a	EU CBAM-covered sectors	Embodied carbon emissions	USD 50/tCO2
	S3−b			USD 80/tCO2
	S3−c			USD 120/tCO2
S4	S4−a	EU CBAM-covered sectors and high carbon leakage risk sectors	Embodied carbon emissions	USD 50/tCO2
	S4−b			USD 80/tCO2
	S4−c			USD 120/tCO2

.

Table 5. Import tariff equivalents for the taxed sectors (unit: %).

Sector	Direct Carbon Emissions			Embodied Carbon Emissions
	USD 50/tCO2	USD 80/tCO2	USD 120/tCO2	USD 50/tCO2	USD 80/tCO2	USD 120/tCO2
Metal smelting	3.29	5.27	7.90	10.70	17.12	25.67
Fabricated metal products	0.53	0.84	1.27	8.04	12.86	19.29
Chemical products	1.90	3.05	4.57	6.45	10.32	15.49
Non-metallic mineral products	3.95	6.33	9.49	8.89	14.22	21.33
Food products	0.32	0.52	0.78	2.85	4.56	6.84
Textiles and apparels	0.19	0.30	0.46	3.86	6.17	9.26
Paper and wood products	0.66	1.05	1.58	5.23	8.37	12.55
Basic pharmaceutical products	0.12	0.19	0.28	3.00	4.80	7.20
Rubber and plastic products	0.27	0.44	0.66	0.92	1.47	2.21

shows the import tariff equivalents for the taxed sectors under different scenarios: in order to prevent double taxation, the import tariff equivalents of coal, crude oil and electricity are set to 0, because these sectors have already been subject to energy tax in China.

4. Simulation Results

4.1. Impact of the EU CBAM on Export Prices

Figure 4 shows the changes in sectorial export prices in China after the implementation of the EU CBAM. Overall, the export prices decrease in all sectors except crude oil (CRU) and natural gas extraction (NAT), despite the fact that the EU CBAM imposes tariffs only on certain products. The magnitude of the change increases with the expansion of the taxed sector and the increase in carbon prices. High-carbon-emitting firms in China could take measures such as increasing R&D spending and optimizing production to meet the EU’s post-CBAM emissions standards, which would increase their production costs. In order to maintain international competitiveness, these firms would have to lower their product prices. Previous studies also conclude that product prices would decrease if the EU CBAM is implemented [11], which is consistent with the results of our simulations. Sectors with a low trade proportion and trade exposure, such as crude oil and natural gas extraction, show moderate impacts on prices [11].

Changes in export prices caused by the EU CBAM vary between different sectors. As shown in Figure 4a, the price changes of non-metallic mineral products (NMM) and coal (COA) are the largest in Scenario 1, which considers only the sectors covered by the CBAM as well as direct carbon emissions. When the carbon price is USD 50, USD 80 and USD 120, the prices of these two sectors decrease by 0.0009%, 0.0014% and 0.0021%, respectively. When expanding the taxed sectors to sectors with high carbon leakage risk, that is Scenario 2, agriculture, forestry, animal husbandry and fishery (AFF) and coal (COA) become the sectors with the largest price declines. Under the three segmented scenarios of carbon prices, they decrease by 0.0013%, 0.0020% and 0.0031%, respectively. Following closely are non-metallic mineral products (NMM) and basic pharmaceutical products (PHA). According to Figure 4b, if embodied carbon emissions are taken as the calculation category (Scenario 3), the sector most affected by the existing EU CBAM is coal (COA), followed by non-metallic mineral products (NMM). For example, when the price of carbon is USD 50/tCO₂, the export prices of these two sectors decrease by 0.0050% and 0.0049%, respectively. When the sectors that may be taxed are further expanded, agriculture, forestry, animal husbandry and fishery (AFF) becomes the most affected sector, followed by food products (FOO) and other service sectors (OSS) (Scenario 4). It is interesting to note that the export prices of crude oil (CRU) and natural gas extraction (NAT) both increase regardless of the simulation scenario and the latter increases more than the former.

Comparing Scenario 2 with Scenario 3, it can be seen that the export price change range in Scenario 2 is smaller than that in Scenario 3. Taking the fabricated metal products (FAB) as an example, under the three carbon prices, if only the type of sector being taxed is expanded, the export prices would decrease by 0.0011%, 0.0018% and 0.0027%, respectively; and if only the scope of carbon emission calculation is changed from direct to embodied carbon emissions, the export prices would decrease by 0.0044%, 0.0069% and 0.0104%, respectively. It can be seen that, after the implementation of the EU CBAM, the impact on export prices caused by changing the carbon emission calculation method is much greater than the impact of changing the sectorial coverage.

4.2. Impact of the EU CBAM on Trade Structure

As shown in Figure 5, there are also differences in the changes in the export volume of China’s exports to the EU by sector after the implementation of the CBAM by the EU. In the direct emissions scenarios, if only the sectors covered by the act are taxed, the export volume of these sectors to the EU would decrease significantly. Among them, chemical products (CHE) have the largest decline, while metal smelting (MET) has the smallest decline (Scenario 1). The remaining sectors show a slight increase in exports due to the absence of carbon tariffs to balance the loss of China’s exports to the EU. After expanding the scope of taxation to sectors with the risk of carbon leakage, the export volume of these sectors also decreased by varying degrees, with only a small increase present in basic pharmaceutical products (PHA), of which very few are exported to the EU (Scenario 2). Chemical products (CHE) non-metallic mineral products (NMM) are the two sectors with the largest decreases in export volume, which decreased by 0.569% and 0.536%, respectively, in the presence of a carbon price of USD 50/tCO₂ (S2−a).

If the EU uses embodied carbon emissions as the carbon emission calculation method, the EU CBAM would be more detrimental to China’s exports to the EU. In Scenario 3, exports to the EU from the taxed sectors all decrease, with the smallest decrease occurring in metal smelting (MET), while the largest decrease would be in chemical products (CHE), which decrease by 1.918%, 3.050% and 4.540%, respectively, at different carbon prices. The rest of the untaxed sectors have a small increase in exports to the EU, with the largest increase occurring in coal (COA). However, even at a carbon price of USD 120/tCO₂, the growth is only 0.099%, far below the smallest decrease in the taxed sectors. In Scenario 4, the export volume of all the taxed sectors, except for the basic pharmaceutical products (PHA), decreases. With a carbon price of USD 120/tCO₂, the export volume of chemical products (CHE), textiles and apparels (TEX) and fabricated metal products (FAB) decreased by 4.389%, 3.908% and 3.754% (S4−c), which is worthy of attention by policymakers.

In addition, in the above scenarios, most of the taxed sectors show an export transfer effect and export inhibitory effect [42], which is consistent with the equilibrium theory. For the untaxed sectors, most of the increase in exports to the EU is higher than that of exports to other countries (regions), and a few show the opposite situation, which is basically consistent with the trend of trade development.

4.3. Impact of the EU CBAM on Trade Value

This paper also focuses on the changes in the value of the exports of countries (regions) after the EU imposes tariffs on products from China. According to Figure 6, from the absolute value, the negative impact of the EU CBAM on China’s export value is considerable. In Scenarios 1 and 2, when the carbon price is USD 50/tCO₂, China’s export value decreases by USD 24.50 million (S1−a) and USD 33.00 million (S2−a), respectively. If considering that the carbon price increases to USD 120/tCO₂, exports decrease by USD 53.00 million (S1−c) and USD 79.50 million (S2−c), respectively. In Scenarios 3 and 4, changes in the calculation of carbon emissions exacerbate the impact of the EU CBAM on China’s exports. Figure 6b shows that, with a carbon price of USD 50/tCO₂, China’s exports decrease by USD 125.00 million (S3−a) and USD 297.00 million (S4−a) in Scenarios 3 and 4. This decline is more obvious with the increase in carbon price. China’s sensitivity to the EU CBAM might be due to the fact that China’s exports are characterized by high environmental costs due to fossil fuel-based energy consumption, making them highly susceptible to the EU CBAM and causing export losses [43]. We also find that, regardless of any change in carbon prices, the decline in China’s export value in Scenario 3 is consistently greater than that in Scenario 2, which further proves that the change in the EU’s CBAM carbon emission calculation method has a greater impact on China’s exports.

It can be found that an EU carbon tariff on China would not only inhibit China’s export value, but would also reduce the value of the EU’s own exports, and that this degree of change would exceed that of China. This means that the EU CBAM would backfire and damage the EU’s competitive advantage. According to the EU’s export structure, although the value of EU exports has increased for most products, its exports in sectors such as transportation and machinery manufacturing have decreased significantly, masking the increase in exports in other sectors. The possible reason for this is the decline in exports of steel and aluminum from other countries (regions) to the EU, limiting the production and export of EU manufacturing products. To this end, the EU also needs to focus on the potential costs of the CBAM. If it fails to improve the competitiveness of its products in international markets, the EU will also suffer huge export losses. The value of exports of the remaining untaxed countries (regions) increases significantly, indicating that there might be a certain degree of trade diversion [44]. The largest increase in export value occurs in the United States; its growth was about 22% of the reduction in China’s exports. The reason might be that the United States, as the world’s major producer and trader of products, could quickly replenish the international market lost by China due to the impact of the EU CBAM. Although India has always been considered a labor-intensive developing country similar to China [45], the impact is weak due to India’s lower export dependence on the EU. India’s increased exports are close to 20% of China’s export losses, implying a strong export substitution for China in the international market.

4.4. Impact of the EU CBAM on Terms of Trade

The changes in the terms of trade after the implementation of the EU CBAM are presented in

Table 6. Changes in terms of trade of China and EU (unit: %).

Scenario	China	EU
S1−a	−0.0009	0.0004
S1−b	−0.0014	0.0005
S1−c	−0.0020	0.0008
S2−a	−0.0014	0.0005
S2−b	−0.0022	0.0008
S2−c	−0.0033	0.0013
S3−a	−0.0048	0.0019
S3−b	−0.0076	0.0030
S3−c	−0.0113	0.0045
S4−a	−0.0132	0.0051
S4−b	−0.0211	0.0082
S4−c	−0.0315	0.0122

Data source: Simulations of GTAP-E mode.

. It can be found that the EU’s terms of trade improve while China’s terms of trade deteriorate. If the EU imposes carbon tariffs on China based on the current CBAM Act, the deterioration of China’s terms of trade is −0.0009% (S1−a), −0.0014% (S1−b) and −0.002% (S1−c), respectively, while the improvement of the EU’s terms of trade is significantly greater than the deterioration of China. China’s terms of trade deteriorate more and more with the expansion of the scope of the taxed sectors and the change in the calculation of carbon emissions.

Based on the changes in the trade balance of various countries (regions), it could be found that China’s terms of trade deteriorate under Scenario 1. The fact that the EU is the largest beneficiary and China is the largest detractor from the EU’s carbon tariffs, and that China’s detriment is higher than the EU’s gain, is also reflected in the remaining three scenarios (see Figure 7 for details). For example, in Scenario 3, if the carbon price is USD 80/tCO₂, the EU’s trade surplus would increase by USD 112.31 million, while China’s trade deficit would increase by USD 126.09 million. According to the trade flow of each country (region), except for the EU, the countries (regions) with the largest increase in trade surplus are India and ASEAN, with USD 5.55 million and USD 4.45 million, suggesting that China’s lost international market would flow to India and ASEAN. Interestingly, we find a slight deterioration in the terms of trade of the United States in Scenarios 1 and 3, while in Scenarios 2 and 4 the net exports of the United States increase significantly. This could be due to the fact that, in the short run, the EU CBAM negatively affects the trade balance of the United States due to the stronger trade linkages between the United States and the EU. With a wider coverage of the taxed sectors, the United States becomes one of the main beneficiaries with its lower emissions costs and emissions intensity [9].

The changes in China’s trade balance by subsector are shown in Figure 8. The direction of trade balance changes in Scenario 1 and Scenario 2 is basically consistent with the change direction of export price and export volume. In Scenario 1, chemical products (CHE) have the largest increase in their trade deficit, which increases by USD 95.00 million, USD 152.19 million and USD 227.46 million at the three carbon prices, respectively. In Scenario 2, textiles and apparels (TEX) is the sector with the second-largest increase in the trade deficit, after chemical products (CHE). However, in Scenario 4, textiles and apparels (TEX) overtake fabricated metal products (FAB) and chemical products (CHE) as the sector with the largest increase in the trade balance.

5. Conclusions and Policy Implications

Since the latest provisions of the EU CBAM were officially released only in May 2023, the existing literature has not yet provided a targeted assessment of the implemented new act. Therefore, it is of great significance for this paper to use the recursive GTAP-E model to simulate the impact of the EU CBAM on China’s exports to the EU in terms of the four aspects of export price, trade structure, trade value and terms of trade, by setting up various simulation scenarios based on the content of the act. The main simulation results are as follows:

(1) When the EU imposes carbon tariffs on China, the export prices of the taxed sectors in China decreases. At the same time, it will also have certain spillover effects on other sectors, so that all sectors other than crude oil and natural gas extraction have the same change trend. The export price of each sector changes more greatly when the carbon emission calculation is changed from direct carbon emissions to embodied carbon emissions. With the expansion of the scope of taxation, agriculture, forestry, animal husbandry and fishery replaced non-metallic mineral products as the most affected sector. (2) The simulation results in China’s export volume to the EU show that most of the taxed sectors show an export transfer effect and export inhibition effect. For other sectors that are not taxed, the growth rate of export volume to the EU is higher than that of other countries (regions). (3) In terms of trade value, the effect of the EU CBAM on some sectors of China would not only inhibit China’s total export value, but would also significantly reduce the EU’s total exports, and the latter’s decrease is even greater. With the expansion of the scope of taxation and the change in the carbon emission calculation method, the change in the export value of China and the EU increases in multiples. Compared with the expansion of the scope of taxation, the change in the carbon emission calculation method has a greater impact on China’s exports. (4) The implementation of the EU CBAM improves the terms of trade of the EU and worsens the terms of trade of China. If the EU taxes China, not only do China’s terms of trade deteriorate, but also the terms of trade of the United States and South Africa deteriorate slightly, and the trade balance is negative. There is also significant heterogeneity in the changes in China’s trade balance across sectors.

In summary, the implementation of the EU CBAM will negatively affect China’s exports to the EU. The findings of this paper provide a new empirical evidence and policy implication for Chinese policymakers and firms on how to take measures to deal with these shocks, and also provide a reference for other developing countries to better respond to the EU CBAM. First, China should strengthen negotiations with the EU on issues such as the measurement of carbon emissions and the determination of the carbon price, in order to secure favorable conditions for the export of China’s carbon-intensive products to the EU. At the same time, China should strengthen cooperation with developing countries in climate change, and improve its discourse power by agreements such as RCEP and the Belt and Road. Second, China should promote the construction of a unified national carbon market as soon as possible. By establishing reasonable carbon pricing and expanding the carbon emission trading sector, the carbon cost of carbon-intensive sectors would be increased, thereby narrowing the price gap between China and the international carbon emission trading market. In order to avoid double taxation, China could take the initiative to levy a differentiated carbon tax domestically, thus allowing the proceeds to be better used to promote the operation of the national economy. Third, the implementation of the EU CBAM has increased the pressure on China’s exports, especially carbon-intensive products, as China is the largest source of embodied carbon emissions from EU imports. To this end, policymakers should consider expanding other areas in the international market to reduce dependence on the EU market, and achieving a diversified international trade strategy, which could help mitigate export losses caused by the EU CBAM and increase the resilience of China’s trade. Finally, firms should establish a carbon emission accounting system for production while improving green R&D technologies. By tracing the carbon footprints of the products, we could gradually achieve carbon reduction targets and minimize the risk of tariffs on exports.

Although this paper reveals the impact of the EU CBAM on China’s exports to the EU, there are still some limitations. Since the latest data on the GTAP-E 10 database are from 2014, this paper obtained the forecast data for 2026 by the recursive dynamic method. The impact of COVID-19 and trade conflicts may lead to deviations between these data and reality. Therefore, in the future, more accurate simulation results could be provided if the latest data are available.