The Effects of CBAM on Russian Exports

Abstract: In 2021, the EU announced the introduction of a carbon border adjustment mechanism (CBAM) to address the carbon leakage problem, which hampers its efforts to mitigate climate change. One of the CBAM requirements is that if an export party can provide that it paid for used carbon domestically, the corresponding amount will be deducted from the EU importers. After the announcement, Russia, one of the major EU trading partners, announced the development of domestic carbon taxation. In this paper, I analyse three scenarios of possible developments for Russia after CBAM implementation. Scenario 1 considers the maximum effect of CBAM on Russian exports. Scenario 2 assumes the impact of the Russian domestic carbon tax on CBAM carbon certificates. The last scenario assumes that China would introduce a mechanism, like CBAM, domestically to protect its producers from the competition, given that Russia could divert its exports destined for the EU to China. The findings of this paper are in line with the expectations. Scenario 1 shows the most impact on Russian exports. Analysing scenario 2, I find that the sole carbon tax benefits only the Russian government, not considering social implications. However, the combination of a carbon tax with the decarbonisation of production facilities aids in the competitive advantage of Russian producers on the global market. Finally, the analysis of the third scenario leads to speculation stating that China might consider implementing CBAM to protect its producers from competition. The reason is that goods from Russia are cheaper while more carbon-intensive. In contrast, goods made in China are subject to a domestic carbon tax, which further increases the price of goods and hampers the competitiveness of Chinese manufacturers.