# I. Introduction

One of the climate policy measures discussed in the European green deal is a Carbon Border Adjustment Mechanism (CBAM) (European Commission [EC], 2019). The CBAM is aimed at protecting domestic industries, creating incentives for other countries to adopt carbon taxes, avoiding carbon leakage, and limiting the reallocation of the EU-based industries to countries with less stringent climate regulations. Compatibility of the CBAM with the World Trade Organization rules could be considered as one of the key obstacles (Krenek et al., 2020). However, if introduced, this policy measure could have sizeable economic implications for the EU trading partners. Literature suggests that while border carbon adjustment can effectively reduce leakage and protect domestic producers, its main effect is the shift of the emission reduction burden to non-abating countries (Babiker & Rutherford, 2005; Böhringer et al., 2012).

Governments of many EU trading partners have raised concerns about possible implications of the CBAM for their economies. Several recent studies have provided an assessment of the CBAM, though mostly focusing on the economic and environmental impacts for the EU (Chen et al., 2020; Krenek et al., 2020; Kuusi et al., 2020).

Ukraine, a country with less stringent climate regulations than the EU, could face adverse impacts of the CBAM implementation. As of 2019, the EU accounted for over 41% of Ukraine’s total commodity exports, including energy-intensive goods such as metals, mineral products and aluminum (State Statistics Service of Ukraine [SSSU], 2020). These trade patterns make the Ukrainian exporters especially vulnerable to the CBAM implementation.

In this paper, we explore how potential imposition of the CBAM could impact Ukraine’s producers and consumers. We also extend our analysis to the other EU trading partners. The rest of the paper is organized as follows. Section II discusses the methodological framework. Section III provides an overview of the Ukraine-EU trade patterns. Section IV discusses policy scenarios and provides an overview of the CBAM impacts on Ukraine. Section V provides an assessment of the CBAM policies for other EU trading partners. Finally, Section VI concludes.

# II. Methodology

To provide an assessment of the possible implications of the EU CBAM on Ukraine, we rely on the computable general equilibrium (CGE) model, namely the GTAP-E (McDougal & Golub, 2007) and the Global Trade Analysis Project (GTAP) 10 Data Base (Aguiar et al., 2019). The GTAP 10 Data Base represents a snapshot of the world economy for 121 countries and 20 aggregate regions for the 2014 reference year, while the economy of each region is represented by 65 sectors. All regions in the GTAP Data Base are linked with bilateral trade flows, including trade in goods and services. The GTAP-E, on the other hand, is a static multi-region CGE model, which incorporates carbon accounting framework. For the current analysis, we aggregate data to the 20 countries/regions and 22 sectors.[1]

To provide an accounting of the CO2 emissions embodied into bilateral trade,[2] we follow an approach outlined in Peters (2008): country-specific CO2 emissions per unit of output by sector are used to estimate emissions associated with bilateral trade flows. For every commodity, total CO2 emissions associated with fossil-fuels combustion and embodied in trade flows from region $r$ to region $s$ ($f_{{rs}}$) are estimated as:

where $F_{r}$ is a vector of region-specific CO2 emissions per unit of output by industries; $E$ is an identity matrix; $A_{r}$ is the technological matrix, which represents the industry requirements of domestically produced products in region $r$; and $e_{{rs}}$ corresponds to the bilateral trade flow from region ${r}$ to region ${s}$.

# III. Overview of the EU-Ukraine trade

For the CBAM impact assessment, we assume that sectors covered by the EU emissions trading system (ETS) are those that face the tax. In 2014, Ukraine exported over US$5.6 billion of commodities corresponding to the EU ETS sectors. Around 70% of this value (US$4.0 billion) corresponds to exports of ferrous metals, which constitute over 20% of total domestic metals production. Chemical products are the second largest category of Ukraine’s exports to the EU (valued at US$0.9 billion). In terms of emissions embodied into exports, ferrous metals represent by far the largest group (Figure 1). Although the value of electricity exports is the lowest among analyzed commodity groups, due to the high carbon intensity of electricity generation, it is the second largest commodity group in terms of emissions embodied into Ukraine’s exports to the EU. Figure 1:Emissions embodied into Ukraine’s exports to the EU and carbon intensity of the selected commodities This figure (left panel) reports CO2 emissions embodied into Ukraine’s exports to EU (in million tons of CO2) for selected commodities that are assumed to face the CBAM. The right panel reports carbon intensity of commodities (in kg CO2 per 1 US$ of final supply) based on Ukraine’s production technologies and EU’s production technologies. Estimates are based on data provided in Aguiar et al. (2019).

Due to the differences in technologies and composition of the analyzed commodity groups in Ukraine and the EU, carbon intensities of production significantly differ between these two regions. While in the case of electricity, Ukraine’s carbon intensity is only twice higher than in the EU, in the case of ferrous metals the difference is ninefold, with Ukraine’s production being more carbon intensive. Depending on whether Ukraine’s or EU’s carbon intensity is used for the CBAM, corresponding ad valorem equivalent rates would largely vary. We consider both these options in the paper.

Sector Change, mn US$% change Australia and New Zealand -126.7 -0.01 Gas -61.1 -0.5 China -703.6 -0.01 Chemicals -2695.4 -1.4 Japan 355 0.01 Chemicals -389.4 -0.4 India -418.2 -0.02 Iron and steel -707.6 -5.9 Rest of East Asia 179.5 0.01 Chemicals -343.2 -0.3 South East Asia -121.4 -0.01 Chemicals -328.9 -0.2 Rest of South Asia 51.7 0.01 Chemicals -23.9 -0.9 USA -231.3 0.00 Chemicals -1038.9 -0.4 Canada -132 -0.01 Gas -60.1 -0.2 Rest of North America -55.8 0.00 Chemicals -100.2 -0.4 Latin America -199.1 0.00 Iron and steel -143.3 -0.9 MENA -1163.1 -0.03 Chemicals -1049.3 -0.9 Sub-Saharan Africa -434.9 -0.03 Other metals -288.3 -0.5 Ukraine -451.3 -0.40 Iron and steel -720.8 -5.1 Russia -34 0.00 Chemicals -1152.5 -4.3 Rest of FSU -228.4 -0.04 Petroleum products -240.2 -1.4 Rest of Europe -341.2 -0.35 Electricity -396.5 -29.9 EU-27 3207.1 0.02 UK 440.9 0.02 EFTA 11.9 0.00 This table reports impacts of the CBAM implementation on changes in welfare and exports for the EU trading partners based on estimates from the GTAP-E model. For impacts on exports, the most impacted sector is identified in each country/region based on the level of reduction in the value of exports. Results for the rest of Europe are mainly driven by Bosnia and Herzegovina, Serbia and North Macedonia. # VI. Conclusions In this paper, we provide a preliminary assessment of the possible implications of the European CBAM on the EU trading partners. We considered a US$26/tCO2 tax, equivalent to the average 2019 EU ETS carbon price,[4] imposed on imports of commodities covered by the EU ETS, and explore impacts of such a tax under two carbon content assumptions – the EU average and country-specific content of imports’ origin.

Even under the case of exporters’ carbon content, we find limited negative impacts of the CBAM on most EU trading partners. Due to the high carbon intensity of iron and steel production and the EU being the key export destination for this commodity, Ukraine is the most impacted country, with a per capita income reduction of up to 0.4%. The rest of Europe is the second most impacted region (-0.35%), with a large reduction in electricity exports (-29.9%). At the sectoral level, chemical products, iron and steel are among the most impacted commodities. In addition to the reduction in iron and steel exports from Ukraine (-5.1%) and India (-5.9%), there is a reduction in exports of chemicals from Russia (-4.3%) and China (-1.3%).

We find limited negative impacts on large energy exporters, both because primary energy commodities are not covered by the ETS and due to the minor impact of the CBAM on global fossil fuel prices (-0.1%). At the same time, as other non-EU countries also face the CBAM there is a redirection of exports from the EU to these other destinations, which reduces potential export losses. Our analysis suggests minor impacts of the CBAM on emission reductions outside the EU.

## Acknowledgments

The research and analysis was conducted as an analytical input to the technical assistance led by the Institute for Economics and Forecasting, National Academy of Sciences of Ukraine (IEF), sponsored by the European Bank for Reconstruction and Development (EBRD) and funded by SIDA to support the Government of Ukraine in its Second Nationally Determined Contribution (NDC) development. Any views, opinions, assumptions, statements and recommendations expressed in this paper are those solely of the author and do not necessarily reflect the official policy nor the position of the Government of Ukraine or others. The author would like to acknowledge valuable comments provided by the EBRD related author’s technical analysis. The author is also grateful for the helpful comments and suggestions from the Editor and referee of this journal.

1. The 20 regions include: Australia and New Zealand, China, Japan, rest of East Asia, Southeast Asia, India, the rest of South Asia, the USA, Canada, the rest of North America, Latin America, the EU-27, the UK, the EFTA, the MENA, Sub-Saharan Africa, Ukraine, Russia, the rest of Former Soviet Union (FSU) and Rest of Europe.
The 22 sectors include: crops, livestock, forestry, coal, oil, gas, other extraction, refined oil products, processed meat, other food, paper products, chemicals, non-metallic minerals, ferrous metals, non-ferrous metals, other manufacturing motor vehicles, other machinery, electricity, trade, transportation services, and other services.

2. Only CO2 emissions from fossil fuel combustion are considered in this study.

3. The change in welfare is estimated using the Hicksian Equivalent Variation.

4. Converted to the US\$2014.