Models for the analysis of international interrelations of the EU ETS and of a CBAM. Summary of the Final Report.

Lutz, C., Banning, M., Reuschel, S., Meyer, M., Paroussos, L., Fragkiadakis D. & Vrontisi, Z. (2025): Models for the analysis of international interrelations of the EU ETS and of a CBAM. Summary of the Final Report. Climate Change 77/2025, https://doi.org/10.60810/openumwelt-7628.

Abstract

The key aim of this research project has been to improve the understanding of the suitability of two types of large-scale models differentiated by industries – macro-econometric models and computable general equilibrium (CGE) models – for analysing international emission effects and economic effects of scenarios in which the EU moves forward in climate policy and applies different design options in the already implemented emissions trading system in this context. In particular, we aim at extending and deepening the knowledge on how the two different models treat the design of the European Emissions Trading System (EU ETS) especially on allocation and of a carbon border adjustment mechanism (CBAM) as implemented under the fit-for-55 reform package, both with a view especially to industry sectors and overall economic activity as well as to changes in the EU industry products’ trade flows and to the risk of carbon leakage.

The results from both models suggest that an effective CBAM can play a significant role in countering the risk of carbon leakage in the case of unilateral EU climate action. Moreover, a CBAM also has a noticeable positive effect on sectoral production in industry and especially in the sectors covered by the EU ETS, as well as on GDP. In essence, both models show that the carbon leakage risk is no convincing argument against EU climate action, if EU ETS and CBAM are properly designed.

In general, the macroeconomic effects of additional international climate mitigation efforts are small, while the carbon emissions are reduced strongly. It is important to note that the economic benefits of global climate protection in the form of lower losses and damages are not included in the scenarios. They are expected to be several times higher than the reported macroeconomic effects of ambitious climate mitigation. The message of the study is strong and positive: far reaching climate protection worldwide is possible and leads only to marginal macroeconomic effects.

By conducting this project, we intend to contribute to the available research by a) providing key results on the economic and emission results for different scenario settings, b) providing indications on which results differ in particular between the two models, and c) improving insights on the influence of the choice of model on the results. Based on our model results, we suggest that there is a high likelihood that the type of model is clearly relevant at least for some specific indicators such as carbon leakage rates and economic quantity and price effects, both economy-wide and (while to a lesser extent) by industry.

In this way, we aim at assisting practitioners – governmental and nongovernmental – as well as researchers in interpreting the results from model-based scenario analyses on the above mentioned questions. Such scenarios can be used for impact assessments, for example by the European Commission. In addition, ideally the report can assist practitioners or researchers when commissioning – or even conducting – own scenario research in the context mentioned here.

In addition to these model-based analyses, the project includes a module with an overview of existing models feasible for estimating carbon leakage and/or measures to address it. It focuses on the two model types applied in this project – CGE models and macro-econometric models. Finally, the project includes an analysis on another type of large-scale model, namely integrated assessment models used for highly aggregated assessment scenario analyses with a time horizon until 2100.