Methodology
For a given sector, CBAM exposure index is measured as the mathematical product of two main elements:
(i) the share of a country’s exports of the CBAM-related product that goes to the EU;
(ii)the embodied carbon payment per dollar of export to the EU, determined by the carbon emissions intensity of production and the assumed cost of the CBAM certificates.
The relevant carbon price in practice will be based on the average weekly price of Emission Trading System (ETS) auctions. In this exercise, we set a notional but representative carbon price equal to $100 per ton CO2, which is in the range of recent European Union Allowance (EUA) futures trading.
A country’s exports of the CBAM-related product that goes to the EU is expressed as a share of a country’s exports of the CBAM-related product to world. The index considers the share of a country's exports of CBAM-related products that go to the EU, which indicates the degree of trade dependence on the EU and challenges in finding other markets. This is based on the logic that higher reliance on EU markets may make it more challenging for countries to shift their exports away from the EU.
The embodied carbon payment per dollar of CBAM product exports to the EU is based on the emissions intensity of production at an assumed carbon emissions price of $100/ton CO2e. The unit of emission intensity is kilogram of CO2 per dollar of production. This reveals the potential change in trade costs for exporting the CBAM products to the EU.
To note, where a carbon price has been paid in the country of origin in respect of GHG emissions embedded in the goods, the importer would be able to claim a reduction in the number of CBAM certificates to be surrendered equal to the carbon price already paid in the third country. This might alter the ranking of countries’ exposure to CBAM.
CBAM exposure index is measured by multiplying the export share by the embodied carbon payment per dollar of export to the EU (the exporter’s emission intensity times $100 per ton carbon price). This index represents potential CBAM cost for exporters.
Relative CBAM exposure index is measured by multiplying the same export share by the difference between the exporter’s emissions intensity and the EU average emissions intensity for the CBAM product, scaled by the assumed CBAM price ($100 per ton). This index identifies countries with an excess of carbon emissions to the EU average. Negative index indicates relatively clean exporters may gain competitiveness in the EU market.
The aggregate CBAM exposure index results from multiplying the exports of all covered sectors of the products to EU by the sum of the total embodied carbon payments (the assumed price multiplied by the exporter’s emission intensity of all covered sectors of the product), divided by the sum of the country's total value of exports of CBAM products to the world.
The aggregate relative CBAM exposure index calculates the sum of the total excess embodied carbon payments (the assumed price times the sum across all covered sectors of the product of exports to the EU multiplied by the difference between their own emissions intensity and the EU average intensity), divided by the sum of the country's total value of exports of CBAM products to the world.
Data
For exports, we collect trade data of CBAM related products at the Harmonized System (HS) 6-digit level for 2019 from the World Bank’s World Integrated Trade Solution. The reason for using 2019 export data is to avoid the effects of global shocks such as the pandemic and Russia’s invasion of Ukraine. We also use mirror data to mitigate data inconsistency from the reporting countries. The trade of countries can be reconstructed on the basis of data reported by partner countries. The data obtained in this way is called mirror data. The list of CBAM-related products at HS 6-digit level is provided in the Annex 1 of the EU CBAM legislation.[1] Following this practice, we use iron and steel, aluminum, cement, fertilizer and electricity.[2] We use a threshold of 10% of trade being directed to the EU as criteria for being deemed exposed to carbon leakage.
For emissions intensity, we use the dataset developed by Chepeliev and Corong (2022) and Chepeliev et al. (2022) which provides greenhouse gas emission intensity embodied in exports by sector and by scope. We use the emission intensity from both Scope 1 (direct emissions from production) and Scope 2 (indirect emissions produced from electricity generation) for cement, fertilizer and electricity and the emission intensity from Scope 1 for iron and steel and aluminum; under the EU CBAM legislation, the CBAM will cover both scopes from the outset for cement, fertilizers and electricity, but initially only direct emissions (Scope 1) will be covered for iron and steel and for aluminum.
The GTAP dataset aggregates sectors, meaning the composition of related commodities can be different than just the CBAM covered products and the underlying emission intensities then correspond to the aggregate. Variation in commodity composition can affect the index more than differences in emission intensity of production processes at the commodity level. In this aspect, fertilizer is of particular concern in this CBAM exposure index, as it represents a subcategory of the chemicals sector. If other chemical products represent, e.g., 80% of chemicals (CHM) exports, this aggregation would substantially decrease the estimated carbon intensity of fertilizers compared to a country where fertilizer constitutes, e.g., 80% of the chemical exports. For other sectors like aluminum and cement, this composition issue has been resolved by breaking out the CBAM products.
Combining the trade and emissions intensity datasets, the sample covers 120 countries.
Visualization
For the map ‘Exports to the EU’, the 10% trade threshold is the EU criteria for being deemed exposed to carbon leakage. Green indicates less EU share in product exports while red does more EU share. For the map ‘CO2 emissions intensity of exports’, the pivot point is the EU27 average CO2 emissions intensity. Green signifies cleaner than the EU average while red expresses more carbon intensive than the EU average. For the relative CBAM exposure index, the threshold is zero. Green (red) indicates countries may gain (lose) export competitiveness.
In the index map, countries with insignificant amounts of exports are excluded to prevent misinterpretation. For example, countries that export less than $0.5 million worth of iron and steel are excluded in the relative CBAM exposure index. Countries with less than $1 million exports of all CBAM products are excluded in the aggregate relative CBAM exposure index. It is to avoid misinterpretation of export share.
References
Chepeliev, M., and Corong, E. 2022. “Revisiting the environmental bias of trade policies based on an environmentally extended GTAP MRIO Data Base.” Center for Global Trade Analysis, Purdue University.
Chepeliev, M., Aguiar, A., Farole, T., Liverani, A., and van der Mensbrugghe, D. 2022. “EU Green Deal and Circular Economy Transition: Impacts and Interactions.” Paper presented at the 25th Annual Conference on Global Economic Analysis (Virtual Conference).
World Bank World Integrated Trade Solution, accessed on January 6, 2023. http://wits.worldbank.org/WITS/WITS/AdvanceQuery/RawTradeData/QueryDefinition.aspx?Page=RawTradeData
[1] https://data.consilium.europa.eu/doc/document/PE-7-2023-INIT/en/pdf
[2] Hydrogen is also on the list, but its trade is still limited and thus less relevant.