The impact of emissions trading schemes on trade

In 2026, the EU is rolling out its Carbon Border Adjustment Mechanism (CBAM). As I previously wrote, this is to incentivize trade partners to reduce their emissions. And I am pretty sure it will reorder trade flows in the EU. Why am I so sure? Because already the EU’s Emissions Trading Scheme introduced in 2003 did so.

Angelo de Santis and his colleagues examined the phased roll-out of Europe’s Emissions Trading Scheme (ETS) that put a price on greenhouse gas emissions and its impact on European trade.

On the face of it, the introduction of an ETS makes imports from countries that are subject to an ETS more expensive. Hence, the expectation is that imports from countries outside the ETS would rise as the ETS is being rolled out. On the other hand, imports could rise if the regulatory alignment with suppliers subject to the ETS leads to less bureaucracy and lower trade frictions from better regulatory alignment.

The chart below shows the change in imports from within the EU in reaction to the rollout of the different phases of the EU ETS. As you can see, imports from within the EU rose even though the ETS put a price on carbon. So, the greater regulatory alignment and less bureaucracy beat the cost savings available from importing from China, India, or other places that could produce at lower prices (something the UK government might want to consider when it thinks about greater regulatory alignment with the EU).

Change in import from within the EU in response to ETS rollout

Interestingly, exports did not change in response to the introduction of the ETS, so there was no ‘cost penalty’ for European exporters to the introduction of the ETS.

Change in export from within the EU in response to ETS rollout

Of course, this change in imports from within the EU could simply be a general trend of increased EU integration. But by comparing imports in sectors affected by the ETS with imports in sectors not affected by it, the researchers could establish that this was not the case. Sectors affected by the ETS increased their intra-EU impots much more than sectors not affected by it.