ADB BRIEFS NO. 276 NOVEMBER 2023 KEY POINTS • Quantitative analyses suggest that the value of the Carbon Border Adjustment Mechanism (CBAM) in terms of mitigating climate change is marginal. However, its impacts on trade patterns, competitiveness, and income distribution are far from negligible, especially for developing economies. • The overall economic impact of the CBAM seems to be limited for Asian economies, but some economies face significant cost increases at the sector level, such as India in the iron and steel sector, Georgia in fertilizer, and Kazakhstan in aluminum. • The CBAM presents an opportunity for Asian economies to focus on developing their carbon markets, while tackling shortfalls in investments required to develop renewable energy sources.  • CBAM-affected economies could consider responding by upgrading the value added of their exports to avoid the carbon tariff. • Diversification of export markets, increasing the productive capacity of non-CBAM sectors, and building statistical capacities may help mitigate the risk exposure to CBAM in the short term. European Union Carbon Border Adjustment Mechanism: Economic Impact and Implications for Asia Cyn-Young Park Director, Regional Cooperation  and Integration and Trade Division Climate Change and Sustainable  Development Department (CCSD) Asian Development Bank (ADB) Yuya Yamamoto Trade Specialist, Regional Cooperation  and Integration and Trade Division CCSD ADB Maria Anne Lorraine Doong Consultant, Regional Cooperation  and Integration and Trade Division CCSD ADB OVERVIEW The European Union (EU) aims to become the first climate-neutral economic bloc by 2050, through the EU Green Deal. In 2021, the EU strengthened this commitment by adopting the “Fit for 55” package, which upholds an interim target of reducing net greenhouse gas emissions by at least 55% by 2030 from a 1990 baseline. This ambition poses an increased risk of carbon leakage—where carbon-intensive industries shift production to economies with less stringent environmental regulations. To address potential carbon leakage, the EU Green Deal includes the Carbon Border Adjustment Mechanism (CBAM), which imposes a carbon tariff on carbon-intensive products such as iron and steel, cement, fertilizers, aluminum, electricity, and hydrogen. These items were selected because they are highly susceptible to carbon leakage and create significant carbon emissions that nevertheless can be tracked (Simões 2023). The European Commission considers CBAM a “landmark tool” for putting a fair price on carbon emissions generated during the production of identified goods (European Commission n.d.). The CBAM imposes a carbon price on imports of emissions-intensive and trade-exposed (EITE) goods to ensure they have a similar carbon price to domestic products. It also aims to prevent carbon leakage. CBAM prevents carbon leakage by “subjecting the ISBN 978-92-9270-487-2 (print) ISBN 978-92-9270-488-9 (electronic) ISSN 2071-7202 (print) ISSN 2218-2675 (electronic) Publication Stock No. BRF230561-2 DOI: http://dx.doi.org/10.22617/BRF230561-2 Note: In this publication, “$” refers to United States dollars. ADB BRIEFS NO. 276 import of certain groups of products from third economies (non-EU and non-EFTA) to a carbon levy linked to the carbon price payable under the EU Emissions Trading System (ETS), supposing if the same goods were produced within the EU,” according to Deloitte (2023). Canada, the United States, and the United Kingdom are also exploring mechanisms for border carbon adjustment. The CBAM regulation entered into force the day after its publication in the EU’s Official Journal on 16 May 2023. The EU plans to implement the CBAM in two stages. First, the transitional phase started on 1 October 2023. During this stage, importers of CBAM goods are required to submit quarterly reports indicating: (i) quantities of CBAM goods imported during the quarter, specified per economy of origin per production site; (ii) embedded direct and, if applicable, indirect greenhouse gas emissions; and (iii) the carbon price due in the economy of origin, if applicable. In the second stage of the CBAM, from 1 January 2026, the full scope of regulation will take effect, with price adjustments on imported products. Importers will need to: (i) obtain authorization to import CBAM goods, (ii) declare the quantity of CBAM goods imported into the EU in the preceding year along with their embedded greenhouse gas emissi