Paving the Way to Sustainability: Assessing the Impacts of Carbon Border Tariffs on the Steel Industry

Abstract: This paper seeks to provide insights into the effects of carbon border tariffs and to offer guidance for policymakers. The focus is directed towards the steel sector - a major contributor to carbon dioxide emissions, where production practices vary significantly among countries, leading to differences in pollution levels. Our primary focus is on the proposed carbon border tariff by the United States, which aims to extend its reach to the EU as well. To investigate this topic, the structural gravity model is employed, which is a widely used model for assessing the effects of policy measures on trade flows. Our findings highlight the effectiveness of steel tariffs in reducing imports, which potentially can redirect production and contribute to a reduction of CO2 emissions. Additionally, it can alter trade patterns and address the concern of carbon leakage. Furthermore, the elasticities vary among steel products. Hence, considering different taxation levels depending on the steel product could be recommended in order to achieve the desired outcome.