Evolutionary Game Analysis of Responding to the EU’s Carbon Border Adjustment Mechanism

Abstract

The European Union (EU) views the carbon border adjustment mechanism (CBAM) as a measure to tackle carbon leakage, which will have a profound impact on non-EU countries’ exports. Policymakers are faced with the question of how to deal with the CBAM. In contrast to previous studies, we explore the effects of the CBAM on non-EU countries from a dynamic game perspective. This study analyzed the potential effects of the CBAM on China and found that the government and export companies are the two main stakeholders. We found that they can both choose whether to respond actively or passively. Based on their interactive relationship, we adopted an evolutionary game to model the nexus between the government and export companies. We analyzed the evolutionary stable state of each stakeholder and the whole game with the replicator dynamic equation system. To make the system evolve to the optimal state where the government reacts actively and export companies implement low-carbon production, we provide a policy mechanism for how to set key parameters’ values. We used numerical simulation to verify the policy design and to conduct sensitivity analyses of the key parameters. Our results show that, when two stakeholders positively react to the CBAM, it is necessary to increase their profits and to reduce their costs. Therefore, some suggestions are proposed, including optimizing the trade structure, strengthening cooperation with the EU, improving the current carbon market, and adopting carbon tax.

The potential impact of EU’s carbon border adjustment mechanism (CBAM): an Australia-China relationship perspective

“…, 2021). China's response to the CBAM is also a key aspect of its trade and diplomatic relations, particularly with the EU and Australia (T. Huang et al. , 2022).…”

“…, 2023). From a legal perspective, Australia and China may need to assess the CBAM's implications on existing trade agreements and domestic environmental laws, ensuring compliance with new emission standards (Huang et al. , 2022).…”

“…The CBAM is expected to negatively impact China's social welfare and exports, particularly in the energy sector, and have broader global economic implications, especially for Australia (Siy et al, 2023). From a legal perspective, Australia and China may need to assess the CBAM's implications on existing trade agreements and domestic environmental laws, ensuring compliance with new emission standards (Huang et al, 2022). This could lead to significant alterations in trade dynamics between these countries and the EU, potentially requiring revisions in bilateral trade agreements to maintain economic stability (Zhong and Pei, 2023).…”

“…China's reaction could set a precedent for other nations, potentially influencing the global approach towards carbon reduction strategies and trade policies (Kardish et al, 2021). China's response to the CBAM is also a key aspect of its trade and diplomatic relations, particularly with the EU and Australia (T. Huang et al, 2022).…”

Research on the Performance Management of Carbon Reduction by Local Governments from a Game Perspective—The Case of the Zhejiang Power Restriction Incident

“…First, previous work has studied the game between governments and carbon enforcers, which exists both within international organizations [36] and within countries [37]. At the national level, carbon-trading behavior is affected by the joint action of enterprises and governments [37].…”