The Global Effects of Carbon Border Adjustment Mechanisms

Climate change poses a collective action problem: countries bear the costs of carbon regulation, while benefits are shared globally. Carbon border adjustment mechanisms (CBAMs) aim to realign incentives by extending domestic carbon pricing to imports. Using plant-level data for aluminum and steel, which account for 11% of global CO2 emissions, we document that emissions intensity is income-neutral and uncorrelated with production costs. Carbon pricing introduces a new margin of green comparative advantage. With a quantitative trade model, we show that CBAMs can boost domestic competitiveness, reduce emissions leakage, and facilitate collective climate action, while largely avoiding disproportionate burdens on lower-income countries.