Asia 6.7.24

1. Asia-Pacific region's response to a European carbon border adjustment mechanism As far as CBAM in Agile Advisors is concerned, the EU declared in July 2021 that it will implement a Carbon Border Adjustment Mechanism (CBAM) to address carbon leakage. This takes the shape of an extra carbon pricing mechanism put in place at the EU border, the value of which is decided by comparing the carbon prices that producers in the EU and outside the EU pay for a particular good. The EU hopes to guarantee level playing fields for its industry by doing this. While many point out that carbon border adjustments could lead to a decline in exports, aggravate regional disparities amongst exporters, and be challenging to execute because of legal challenges resulting from WTO conventions, they are nevertheless seen as an effective tool against carbon leakage. Being in Agile Advisors as a CBAM regulations, we also present a case study of how the policy has affected the Asia and Pacific (APAC) region, home to numerous sizable developing economies. Since broad carbon pricing still needs to be implemented in this region, they are expected to be the most susceptible to implementing the CBAM.Regardless of the locale, our study demonstrates that the CBAM has little effect on wellbeing. Nevertheless, the policy is anticipated to lower exports; worldwide drops are predicted to range from -0.29% (metal products) to -1.49% (steel products). The most significant export reductions are expected in South and Central Asia, which would amount to -7.03% for chemical items and -10.52% for crude steel products, respectively. This specific outcome implies that the CBAM is a policy that favors protection. As an Agile Advisors Carbon Border Adjustment Mechanism, since its announcement, numerous studies have simulated the possible impact of the EU's carbon border adjustment system, which is the first to be deployed. Most notably, even though reducing global emissions is the primary goal of the CBAM, it is

2. anticipated to have minimal effect on emissions (Kor par et al. 2023, Zhong and Pei 2022). Trade policies, however, frequently have more complicated effects on emissions because they affect shipping emissions differently or have unintended consequences on the demand for downstream products. Our goal in the most recent analysis (Murtha et al. 2023) is to incorporate emissions from shipping operations and production-related emissions. We employ a trade-focused structural gravity model to model the effects of the CBAM using data from 2014. In our role as CBAM, that would effectively address carbon leakage because it is anticipated to reintroduce industrial output within the EU. Case studies from Asia and the Pacific demonstrate how sensitivity to the policy varies significantly based on one's degree of development. The CBAM mainly affects middle-income economies, resulting in notable drops in emissions, production, and exports. Figure 1 depicts variations in China's and Japan's steel exports to support this claim. China, whose production is more emissions-intensive and did not implement carbon pricing in 2014, would have to pay comparatively more for CBAM. The simulation, therefore, forecasts a steep drop in Chinese exports to the EU and a marginal rise in shipments to Africa. To help you as Carbon Border Adjustment Mechanism, on the other hand, because of the global warming tax and the high carbon efficiency of its energy-intensive products, Japan is anticipated to see comparatively low CBAM pricing. The exempted amount acknowledges that domestic businesses do not pay any more taxes on emissions that do occur once they have incurred the mitigating costs necessary to bring emissions down to exempted levels. Accordingly, our research indicates that this strategy might exacerbate international inequality and help to establish a "Climate Club" of wealthy countries that trade with one another. The working paper looks at several scenarios that vary depending on how the two countries' respective climate policies are structured and implemented.