An Intertemporal General Equilibrium Analysis of the EU Carbon Border Adjustment Mechanism with Jean Mercenier and Ebru Voyvoda

Date: December 18, 2025 - Thursday

Time: 14:00

Place: santralistanbul Campus, E1-AKO Meeting Room

Speaker: Prof. Alp Erinç Yeldan

Abstract

The European Union has recently embarked upon a Carbon Border Adjustment Mechanism (CBAM) to combat carbon leakage and align its ambitious climate goals with the patterns of global trade.  Covering only 3% of the EU imports, the CBAM in isolation is argued to have little impact on the global patterns of trade. Yet, due to its potential threat of triggering retaliatory measures and reformation of distortionary trade clubs, it may have over lasting effects inhibiting the potential success of global efforts against climate change.

Utilizing a multi-regional model that accommodate inter-temporal reallocation effects by forward-looking agents under infinite horizon and decentralized inter-temporal optimization, we study four policy scenarios: first, we invigorate the future pathway of the Emissions Trading System in EU with a projected cap on ETS sectorial emissions extending to 2050.  Second, the CBAM is implemented, and its potential macroeconomic and social welfare effects are tabulated. We envisage two opposing responses from the non-EU global economy: (i) instrumentalization of a retaliation tariff rate across the trade partners, to maintain their individual (regional) social welfare against the EU CBAM; and (ii) a scenario of cooperation via full alignment with the EU’s ETS carbon price, accepting the economic rationale of CBAM as a sanctioning instrument.