The Long-Term Impact of Carbon Border Adjustment Mechanism on China’s Power Supply and Demand and Environmental Benefits: An Analysis Based on the Computable General Equilibrium Model

Abstract

In the process of responding to global climate change, carbon tariffs have attracted much attention as a new type of trade protection and environmental governance means. The European Union is a pioneer in global carbon tariff policies. Currently, there is no research system to assess the impact of the Carbon Border Adjustment Mechanism on China’s economic, energy and environmental development. Based on the dynamic computable general equilibrium model, this paper assesses the long-term impact of Carbon Border Adjustment Mechanism on China’s economic growth, power supply and demand, and environmental benefits. The research findings are as follows: (1) The implementation of Carbon Border Adjustment Mechanism has reduced China’s total GDP, especially when the free quota was completely abolished, which is when the decline was the greatest; The output of high energy-consuming industries such as steel and aluminum will also decrease simultaneously. (2) The implementation of Carbon Border Adjustment Mechanism has significantly increased the proportion of photovoltaic power generation, while reducing the electricity consumption of the manufacturing industry, accelerating the green transformation of China’s power generation structure. (3) Carbon Border Adjustment Mechanism has enabled China to reach its carbon peak earlier and lower the peak value, but the marginal cost of emission reduction is higher than that of existing carbon reduction measures. This research is of great significance for addressing the challenges of Carbon Border Adjustment Mechanism and promoting the low-carbon transformation of the economy.

1. Introduction

The global climate governance system, since the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) (The full terms and abbreviations of all professional terms in the text are shown in Appendix A.1.) and the Kyoto Protocol, has consistently adhered to the principle of “common but differentiated responsibilities”. This principle requires developed countries to take the lead in assuming historical emission responsibilities and fulfilling mandatory emission reduction obligations, while allowing developing countries to defer compulsory mitigation measures based on their right to development. However, as the climate crisis intensifies, the global mitigation landscape has increasingly exhibited asymmetric characteristics. The International Energy Agency (IEA) warns that if developed and developing countries persist in adopting divergent mitigation pathways, the additional carbon emissions from developing nations by 2050 may fully offset the emission reductions achieved by developed countries. The European Union has continuously advanced regional low-carbon transition since the Kyoto Protocol came into force. However, empirical evidence reveals that unilateral mitigation policies have led to declining competitiveness of domestic carbon-intensive industries, with enterprises circumventing regulation through capacity relocation or importing high-carbon products, resulting in “carbon leakage” [1]. According to European Commission estimates, carbon leakage-induced emission transfers accounted for 12–15% of the EU’s total emissions during 2015–2020 alone, significantly undermining the effectiveness of its climate policies.

To address this structural dilemma, the European Union launched the European Green Deal in December 2019, which systematically outlines carbon neutrality pathways toward 2050 and introduces the “Fit for 55” interim policy framework. This framework establishes an ambitious target of reducing greenhouse gas emissions by 55% from 1990 levels by 2030. This framework gained legal enforceability through the European Climate Law formally implemented in July 2021, wherein the Carbon Border Adjustment Mechanism (CBAM) was incorporated into the legislative agenda as a pivotal policy instrument. During policy formulation, the European Union has progressively expanded the coverage of its Emissions Trading System (EU ETS) to high-carbon sectors such as maritime shipping and aviation, while establishing a border adjustment mechanism linked to internal carbon pricing to mitigate trade distortions caused by “carbon pricing gaps”. On May 16, 2023, CBAM was officially enacted, marking the formal implementation of the EU carbon tariff and establishing the EU as the world’s first region to introduce a carbon border tax [2]. Under CBAM regulations, the EU imposes either tariff adjustments or import certificate obligations on high-carbon imported goods during cross-border trade transactions, thereby equalizing carbon pricing between foreign and domestic products. CBAM applies to products imported into the EU from all countries. The first batch of sectors subject to the mechanism includes iron & steel, aluminum, electricity, cement, fertilizers, and hydrogen. During the transitional period, only direct emissions are covered for iron & steel, aluminum, and hydrogen, while both direct and indirect emissions (along with a limited number of downstream products) are included for cement, electricity, and fertilizers. The effective date is 1 October 2023. Specific details are presented in

Table 1. CBAM phase requirements.

Phase	Time Frame	Implementation Requirements
Transitional Phase	1 October 2023–31 December 2025	During this phase, importers of high-carbon products covered by CBAM from non-EU jurisdictions are solely subject to a reporting obligation. They must declare the quantity of imported goods and the corresponding total embedded direct emissions, with no payment obligation incurred.
Full Implementation	1 January 2026–31 December 2034	During this phase, importers of CBAM-covered high-carbon products from non-EU jurisdictions are subject exclusively to a reporting obligation: they must declare both the quantity of imported goods and the corresponding total embedded direct emissions, incurring no financial liabilities.
Post-Free Allowance	From 1 January 2035	The European Union will fully eliminate free allowances for CBAM-covered high-carbon products by 2035. During this phase, importing enterprises will be unable to deduct carbon emissions using free allowances.

.

As each other’s second-largest trading partners, China and the EU have developed a deeply integrated and interwoven relationship in supply chains, industrial chains, and value chains. This highly embedded interdependence not only reflects the breadth and depth of their economic cooperation but also implies that any policy adjustment by either side could exert profound impacts on bilateral trade relations. In recent years, China-EU trade volume has maintained steady growth. According to customs statistics, the export value and year-on-year growth rate of China’s trade with the EU from 2014 to 2024 are illustrated in Figure 1. In 2024, trade between China and the EU maintained strong momentum, with China’s total exports to the EU reaching $516.461 billion. CBAM may introduce new uncertainties into bilateral trade flows.

According to data released by China’s General Administration of Customs, China’s exports of CBAM-covered products to the EU in 2023 totaled 99.2 billion CNY, accounting for 4% of China’s total exports to the EU. The product categories and export details are presented in

Table 2. Product categories covered by CBAM and corresponding export data.

Product Category	Greenhouse Gases	Covered CN Codes	Transitional Period Reporting	Implementation Period Reporting	Export Value (Billion CNY)
Steel and steel products	CO2	27 CN codes under Chapters 72 and 73, of which 13 are exclusion-specific.	Direct Emissions and Indirect Emissions	Direct Emissions	761.5
Aluminum and aluminum products	CO2, PFCS	14 CN codes under Chapter 76	Direct Emissions and Indirect Emissions	Direct Emissions	227.3
Fertilizers	CO2	6 CN codes under Chapters 28 and 35, of which 1 is exclusion-specific.	Direct Emissions and Indirect Emissions	Direct Emissions and Indirect Emissions	3
Cement	CO2, N2O	6 CN codes under Chapter 25	Direct Emissions and Indirect Emissions	Direct Emissions and Indirect Emissions	0.31
Hydrogen	CO2	1 CN code under Chapter 28	Direct Emissions and Indirect Emissions	Direct Emissions and Indirect Emissions	<0.01

. Based on 2023 statistics from China’s General Administration of Customs, the steel sector faces CBAM-related costs of 76.15 billion CNY, accounting for 1.4% of China’s total exports to the EU, while the aluminum sector involves 22.73 billion CNY, representing approximately 0.4%. In contrast, the fertilizer and cement industries show significantly lower impacts, with values of 300 million CNY and 31 million CNY, respectively. These figures suggest that the formal implementation of CBAM will substantially weaken the export competitiveness of China’s steel and aluminum industries in the European market.

Based on the above analysis, the implementation of CBAM may affect the export share of covered goods in China, and further spread to the output value scale of this product and its upstream and downstream products through the industrial chain transmission mechanism. This transmission mechanism is mainly manifested in the fact that during the manufacturing process of covered goods, raw material suppliers are required to provide carbon footprint data, reducing the demand for high-carbon materials. Downstream manufacturers may lose their price advantage due to the rising cost of raw materials. Additionally, the decline in production levels may trigger chain reactions on China’s total electricity consumption and carbon emissions, thereby posing challenges to the progress of its “Dual Carbon” goals. However, there is currently no study that systematically evaluates the specific mechanisms and quantitative impacts of CBAM on China’s economic, energy and environmental development. Therefore, this paper constructs a dynamic computable general equilibrium (DCGE) model to study the impact of CBAM on the macroeconomy, power supply and demand, and carbon emission reduction. The possible marginal contributions are reflected in three aspects: First, this paper assesses the economic and emission impacts of the implementation of the CBAM by simulating the baseline scenario and the output levels of various industries in China under the impact scenario of the CBAM. Secondly, innovatively considering whether the implementation of the policy will affect China’s power generation and the electricity consumption of various industries, this paper further simulates the impact of the CBAM policy shock on China’s power generation, power generation structure, and electricity consumption of various industries and explores the changes in the supply and demand structure of the power market. Thirdly, based on the proportion of CBAM free quotas, the changes in China’s macroeconomy and carbon emissions before and after the cancellation of free quotas compared to the benchmark scenario were analyzed, respectively, and the impact of the implementation ratio of CBAM free quotas on the output of different industries was further analyzed.

The structure of this paper is organized as follows: Section 2 reviews the research progress on the CBAM; Section 3 elaborates on the model methodology; Section 4 discusses the empirical results; Section 5 concludes with policy recommendations.

2. Literature Review

2.1. Review of CBAM

In April 2023, following approval by the European Parliament, the world’s first cross-border carbon tariff mechanism was formally established as law [3]. According to the implementation schedule, the EU carbon border tariff has taken effect in 2023, with the period from 2023 to 2025 designated as a transitional phase. During this transitional phase, CBAM initially applies to only five sectors: electricity, steel, cement, aluminum, and fertilizers [1], with gradual extension to industries including organic chemicals, plastics, hydrogen, and ammonia. In 2026, downstream products such as organic chemicals and plastics will be incorporated, while a 10% annual reduction in free allowances for manufacturing enterprises will be implemented until their complete phase-out by 2035.

CBAM is a key policy instrument implemented by the EU to prevent carbon leakage, achieve climate targets, and enhance the competitiveness of domestic industries [4,5,6]. It imposes charges on the carbon emissions embedded in imported goods, thereby equalizing the carbon costs between imported products and those manufactured within the EU. The implementation of CBAM prevents carbon-intensive industries originally located in the EU from relocating to countries or regions with laxer carbon emission regulations due to stringent carbon reduction policies, thereby mitigating negative impacts on the EU’s domestic economy and avoiding adverse effects on global emission reduction efforts.

The EU ETS was established in 2005 and is the representative market with the largest number of participating countries, the largest trading scale and the most active trading. The research finds that the EU ETS price will increase the production cost of EU power generation enterprises, raise the electricity market price, significantly increase the profits of power generation enterprises, and at the same time, the implementation of ETS reduces the competitiveness of industries such as steel and cement in the EU [7]. CBAM is primarily based on the EU ETS, imposing carbon tariffs on goods from countries with lower environmental standards than the EU while providing tariff credits for imported goods that have already paid carbon prices in their origin countries. Its trade effects are constrained by three key factors: export structure, production carbon intensity, and trading partners’ carbon policies [8,9]. CBAM will generate adverse distributional effects and exacerbate regional inequalities. If applied to all goods covered by the EU ETS, approximately 16 billion dollars of goods exported by developing countries to the EU will face additional costs, despite these economies contributing only a minimal proportion of the CO₂ embodied in total EU imports [10].

Since the EU CBAM imposes differential carbon tariffs based on the carbon intensity of different countries and regions, those with higher emission levels will bear proportionally higher tariff costs [8]. In terms of country-specific impacts, CBAM disproportionately affects developing economies [11,12,13]. Ref. [14] employed the GTAP model to analyze the economic and environmental impacts of carbon tariffs, concluding that such tariffs would increase global abatement costs and shift the economic burden of developed countries’ climate governance to developing nations. Through gravity model analysis, [13] demonstrated that while carbon tariffs exhibit global CO₂ reduction effects, these emissions reductions come at the expense of other countries’ welfare, particularly imposing significant adverse impacts on developing economies.

2.2. The Impact of CBAM on China’s Economic Development, Power Supply and Demand, and the Environment

China is the EU’s largest trading partner. The CBAM provides a relatively long transition period, but its short-term impact on China’s industrial economy remains limited. However, in the long run, as CBAM expands to cover all imported goods and services, it will significantly affect the competitiveness and export pricing of China’s carbon-intensive industries. This will reduce the market share of Chinese export enterprises, increase export costs for carbon-intensive sectors, weaken the international competitiveness of China’s export industries, and consequently restrain China-EU trade volumes. Furthermore, an analysis estimating profit losses in certain export-oriented emission-intensive industries reveals that the EU’s CBAM impacts countries’ trade competitiveness differently, depending on their production carbon intensity and trade exposure. For instance, in the steel sector, China and the Russian Federation are projected to face disproportionately larger impacts [15].

Existing studies generally suggest that the EU’s policy of imposing a carbon border tax has had a negative impact on China’s exports [16]. Ref. [17] found that the implementation of CBAM increased export costs, resulting in a decline in the competitiveness of the five major energy-intensive industries. Ref. [18] employed scenario simulation methods to examine the impacts of carbon border taxes imposed by the EU and US on China, reaching consistent conclusions. Ref. [19] simulated the direct and indirect electricity emissions of the chemical sector covered by CBAM. The data shows that the export cost of China’s chemical sector to Europe will increase by 105 million euros. Ref. [20] conducted simulation studies using the GTAP-E model to examine the impacts of CBAM on China’s exports to the EU. Their results show that the export volumes of China’s affected industries are influenced by both trade diversion and suppression effects. While the mechanism improves the EU’s terms of trade, it simultaneously deteriorates China’s trade terms.

CBAM may lead to a reduction in electricity exports in some high-carbon power-producing countries, while those in low-carbon power-producing countries may increase. This will prompt changes in the global power trade pattern. Some countries may increase the production and export of low-carbon power to meet international market demands. Meanwhile, the implementation of CBAM has further encouraged non-EU countries that are highly dependent on EU exports to accelerate their energy transition. Take China as an example, to reduce the carbon tariff cost of export products, it will speed up its energy transition and increase the proportion of renewable energy in its power generation structure. For instance, some export-oriented enterprises in China have increased their purchase and use of green electricity to meet the requirements of the EU’s CBAM, promoting the development of clean energy power generation in China.

Furthermore, Chinese enterprises will face new requirements including green electricity procurement, carbon footprint verification, and information disclosure. Taking the EU CBAM legislative proposal as an example, EU importers are required to declare the greenhouse gas emissions embedded in their imported products from the previous year, which serves as the basis for determining the number of CBAM certificates required. Ref. [21] argue that China needs to accelerate its carbon mitigation capacity development while simultaneously considering the adoption of a tradable green certificate system to offset carbon border tariffs.

3. Research Method and Data Resource

3.1. CGE Model

This research constructs a CGE model to evaluate the impacts of the CBAM on carbon emission reductions and industrial production in China. The CGE model is a recognized and widely utilized approach for conducting dynamic simulations of the energy-economy system and assessing the effects of policy measures [22]. For instance, ref. [23] utilized the CGE model to assess the contributions of BECCS technology and forest carbon sinks to China’s pursuit of carbon neutrality, whereas ref. [24] leveraged it to analyze the economic consequences of BECCS technology in advancing China’s deep decarbonization efforts. Furthermore, ref. [25] developed an energy-economy-environment model grounded in the CGE framework to explore the carbon market’s contribution to China’s objective of achieving a carbon peak by 2030. Drawing on previous studies, this paper integrates CBAM policy shocks into a DCGE model to establish a CGE framework that includes CBAM considerations. This enables us to examine the effects of CBAM policy shocks on carbon emissions and industrial production. The CGE model presented in this study encompasses four primary modules: production function, income-expenditure, trade, and energy-environment, as depicted in Figure 2.

Initially, the production function is characterized through the application of a hierarchical Constant Elasticity of Substitution (CES) function. Within this framework, the highest-tier CES function encompasses both factor inputs and intermediate inputs. Factor inputs comprise labor, capital, and energy inputs, all of which are also delineated using multi-tiered hierarchical CES functions. The intermediate input employs the Leontief function, which implies a structure with unchanging intermediate input proportions. The income-expenditure module illustrates the circulation of income among the government, businesses, households, and overseas entities. Each participant either spends or earns returns from other participants. In the production process, firms procure labor and capital from the factor market and compensate for these inputs accordingly. Labor compensation is allocated to residents, whereas capital compensation is distributed among residents, businesses, and foreign entities. The government collects value-added tax from the production sector, corporate income tax from domestic businesses, personal income tax from households, and tariffs on imported goods. Concurrently, the government disburses transfer payments to residents and offers export rebates for exported goods.

The commerce module delineates how domestic companies allocate their products across both domestic and international markets, as well as how domestic consumers decide between domestically produced and imported items. The aggregate output from production activities is apportioned to domestic supply and exports through the Constant Elasticity of Transformation (CET) function. Imported and domestic supplies collectively constitute the Armington supply. Based on [26] theory, products within an identical industry are distinguished by their source. Items originating from the same nation are entirely interchangeable, while those from distinct nations are not.

The energy-ecology module demonstrates the influence of energy inputs on the ecological system. By adopting the methodologies of [27,28], energy inputs are classified into non-electrical and electrical energy categories. Non-electrical energy encompasses coal, coal-based products, natural gas, petroleum-based products, and thermal energy. Electrical energy, which includes electricity generation and transmission/distribution, is represented using the Leontief function. Power generation sources are divided into stable (such as coal, gas, hydro, and nuclear power) and unstable types (like wind and solar photovoltaic power, owing to their fluctuating output). The ecological module monitors sulfur dioxide, nitrogen oxides, additional pollutants, and carbon emissions. Excluding intermediate inputs and electricity, which are specified by the Leontief production function, all remaining elements employ a production function with a fixed substitution elasticity, denoted by σ.

The detailed calculation method of the CGE model can be referenced in [29]. Considering that CBAM mainly exerts its influence through taxation and foreign trade mechanisms, here we introduce the relevant module. The Settings of the elastic parameters therein are shown in Appendix A.3.

The output of production is divided into two parts. One refers to the supply of domestic goods and the other refers to the export of goods. The substitute relationship can be depicted by Formulas (1)–(3), where ${QA}_i$ represents the output of sector $i$, ${QDA}_i$ is the domestic product for domestic supply of sector $i$, ${QA}_i$ is the export of sector $i$. $\alpha$ is the scale factor, $\delta$ is the share factor, $\rho =1-1/\sigma$ is a coefficient determined by substitute elasticity.

$${QA}_i={\alpha }_i^{cet}{\left({\delta }_i^{cet}QD{A}_i^{{\rho }_{cet}}+\left(1-{\delta }_i^{cet}\right){QE}_i^{{\rho }_{cet}}\right)}^{1/{\rho }_{cet}}$$

(1)

$${PDA}_i/{PE}_i=\left({\delta }_i^{cet}/\left({1-\delta }_i^{cet}\right)\right){\left({QE}_i/{QDA}_i\right)}^{1-{\rho }_{cet}}$$

(2)

$${PA}_i·{QA}_i={PDA}_i·{QDA}_i+{PE}_i·{QE}_i$$

(3)

The export price can be calculated by the foreign price ${pwe}_i$, the exchange rate $exr$, and the export tax ratio $ext$, which can be explained by Formula (4). When the export tax ratio increases, under the condition of the same foreign prices, the tax-excluded export prices of domestic producers decrease, and exports decline. Meanwhile, the income of the producers has decreased. Through the adjustment of the export tax ratio, the CBAM-induced taxation can be integrated into the CGE model.

$${PE}_i=pw{e}_i·exr·(1-ex{t}_i)$$

(4)

The dynamic framework employs a recursive approach to determine the model’s dynamic parameters, computing the sequential parameter values for subsequent stages based on the outcomes from preceding ones. For assessing capital accumulation, this study utilizes the Perpetual Inventory Method (PIM) introduced by [29]. The capital buildup in the current period is derived from the capital stock of the prior period, investments made in the current period, and the depreciation rate. The PIM formula is presented as follows:

$$K_t=\left(1-{\delta }_K\right)K_{t-1}+{\displaystyle \frac{I_t}{P_t}}$$

(5)

This method is currently the most popular one for measuring capital stock. Among them, $K_t$ represents the depreciation rate, ${\delta }_K$ represents the capital depreciation rate, $I_t$ represents the current investment amount, and $P_t$ represents the current price of the investment commodity.

3.2. CBAM Shock Setting

The CBAM encompasses six key sectors: iron and steel, cement, aluminum, fertilizers, electricity generation, hydrogen production, and indirect emissions under certain circumstances. This article sets the impact of CBAM on various industries based on the proportion of EU exports to the corresponding industries in China and the CBAM tax rate. The tax rates of the industries involved in CBAM are shown in

Table 3. The industry tax rates involved in CBAM.

Industry	Proportion of the EU (%)	Unit Emission	The Extent of Tax Surcharge (%)	Average Export Tax Rate of the Industry (%)
Cement	4	0.55	96.25	3.95
Steel	28	1.5	35.00	9.67
Aluminum	12	6	21.00	2.57
Fertilizer	1	0.511	18.83	0.20

.

Meanwhile, there was an exemption amount at the beginning of the collection of CBAM, but the free quota gradually decreased. Among them, the free quota factor of the corresponding industry of EU ETS will decrease in proportion as shown in

Table 4. The free quota retention ratio of CBAM.

Year	Free Allowances Ratio (%)
2026	97.50
2030	51.50
2033	14.00
2034	0.00 (Completely abolish the free quota)

. Therefore, in the dynamic model, we increase the export cost year by year according to the ratio of the quota to be taxed.

This paper constructs two scenarios based on whether it is impacted by the CBAM policy: the benchmark scenario that is not impacted by the policy and the scenario that considers the impact of the CBAM policy shock. Based on the differences in tax policies under the two scenarios, the impact of CBAM on China’s carbon emissions and macroeconomy is further analyzed. In the short term, the EU will only impose carbon tariffs on five high energy-consuming industries: electricity, steel, cement, aluminum, and fertilizers. In the long term, while the EU will maintain taxation on the import value of the above five major industries, it will also start to impose tariffs on imported products of other industries.

3.3. Data Source

The foundational data for the model is sourced from the 2017 China Input-Output Table, and the construction of the social accounting matrix follows the approach outlined by [22]. The 2017 China Input-Output Table encompasses 149 product sectors. To streamline the analysis, this study has consolidated and reclassified these sectors. Specifically, drawing on GTAP input-output data [30], the power and heat production and supply sectors were subdivided into eight categories: power transmission and distribution, coal-powered generation, gas-powered generation, hydroelectric power, nuclear power, wind power, photovoltaic power, and heating. Additionally, the extraction of oil and natural gas was separated into distinct categories.

In terms of population trends, based on United Nations population projections, the anticipated growth rates of the working-age population for the periods 2020–2025, 2025–2030, 2030–2035, 2035–2040, 2040–2045, and 2045–2050 are −0.54%, −2.00%, −4.38%, −4.77%, −3.04%, and −3.75%, respectively. According to the “2017 Statistical Data Report on the Total Social Financing Scale,” the total social financing scale in 2017 amounted to 174.64 trillion yuan. Based on the input-output table, the depreciation of fixed capital in 2017 was 11.03 trillion yuan, yielding a corresponding depreciation rate of 6.32%.

4. Result Discussion

4.1. The Impact of CBAM on the Economy

4.1.1. The Impact of CBAM on the Macroeconomy

The changes in macroeconomic variables under the impact of CBAM are shown in Figure 3. Meanwhile, the definitions of macro variables are as shown in Appendix A.2. The vertical axis represents the proportion of changes in different macroeconomic variables compared with the benchmark scenario. It can be seen from the graph that due to the implementation of CBAM, China’s GDP has significantly declined compared to the benchmark scenario, and the decline is expected to reach its maximum around 2035. Subsequently, it will converge after the economic readjust, but it will still remain below the national income level under the benchmark scenario for a long time. Meanwhile, as shown in Figure 3, the consumption level of residents presented a trend of rising first and then falling during policy shocks. This might stem from the fact that in the early stage of the implementation of CBAM, the export levels of goods in various industries in China were affected by the carbon tariff policy and declined. At the same time, some suppliers turned to the domestic market for sales, which led to a significant drop in domestic commodity prices and thus stimulated residents’ consumption. However, as the impact of the negative shock of total output spills over, the household income level gradually declines, thereby reducing the household consumption level. Furthermore, the changing trends of household, enterprise and government income are consistent with GDP. This also indicates that the impact of the CBAM policy shock is not limited to a single level, but affects the income levels of all groups in China.

4.1.2. The Impact of CBAM on the Output of Different Industries

The policy shock of CBAM directly affects the export trade volume of various countries and further influences the output levels of different industries. Based on the adjustment policy of the gradual reduction in the CBAM exemption amount, it can be found that the marginal output of each industry decreases, and the output peaks are mostly concentrated in 2034, and then gradually decline. This phenomenon is in line with the policy setting of the CBAM to gradually reduce the free quota and completely abolish it by 2034, indicating that the free quota can still play a buffering role at a specific stage and to a certain extent, promote the improvement of the output level of China’s steel and non-ferrous metals industries. Meanwhile, by comparing the output results of the two scenarios in Figure 4, it can be found that although the implementation of CBAM can reduce the output of steel and non-ferrous metal products, the reduction level is relatively limited and only effective in the initial stage of CBAM implementation. This may be due to the fact that with the implementation of policies related to China’s “dual carbon” goals, the future production demand for high energy-consuming products has been reduced. Therefore, the degree of impact of CBAM on different industries in China has weakened. Based on the impact of CBAM on the output of different industries in China, it can be found that the implementation of this policy will lead to a decrease in the total output of some industries in China.

From the perspective of trade structure, China’s steel products exports to Europe account for approximately three quarters of the total trade volume with Europe, and aluminum products account for about one quarter. In contrast, the trade volume of other industries covered by the CBAM is relatively small. Based on the current scale of China’s trade with the EU and the predicted data of future scenarios, if the EU completely cancels its quotas by 2034, the cost of China’s steel exports to the EU will increase significantly. From the perspective of the total industry output value, as shown in Figure 4a, under the scenario of implementing the CBAM policy, the output value of China’s steel industry in 2034 is approximately 9.2 trillion yuan, a decrease of about 2.1% compared to the benchmark scenario. When the free quota drops to zero, China’s steel output value will further decline, with the maximum decrease reaching approximately 2.4%. Since then, with the improvement of China’s economic development level, although the impact of the CBAM policy on the output of China’s steel industry has weakened to some extent, the output value is still lower than the benchmark scenario level. It can be seen from this that CBAM will have a substantive impact on the total output value of China’s steel industry. Furthermore, as shown in Figure 4b–d, compared with the steel industry, industries such as non-ferrous metals, cement, and power generation were affected by the CBAM policy, and their output value decreased less, approximately one-tenth of that of the steel industry. This further indicates that the CBAM policy has a lower degree of impact on products with relatively small export volumes.

4.1.3. The Impact of CBAM on Other Industries

In addition to imposing carbon tariffs on the five high-energy-consuming industries of steel, cement, aluminum, fertilizers and electricity, CBAM will expand its scope of influence by 2030. On the basis of imposing carbon taxes on the above-mentioned industries, it will further extend to cover all products in the EU carbon market. This section further calculates the output changes in industries other than the above-mentioned five high energy-consuming industries after 2030 based on the CGE model. The results are shown in

Table 5. The changes in industry output under the impact of CBAM (%).

	2030	2040	2050	2060
Coal	−0.256	−0.487	−0.423	−0.355
Oil	−0.014	−0.039	−0.038	−0.031
Natural gas	−0.017	−0.042	−0.038	−0.030
Textile	0.087	0.091	0.049	0.024
Transportation	0.002	−0.007	−0.010	−0.011
Manufacture	0.199	0.301	0.218	0.140
Service	−0.009	−0.017	−0.014	−0.011

. It can be found that under the influence of CBAM, the output of coal in China has declined the most, while the transportation industry has been less affected. At the same time, it can also be found that the output of the manufacturing industry has increased after the implementation of the CBAM.

From the perspective of the interrelationships among various industries of the national economy, high energy-consuming industries such as steel, cement, aluminum, fertilizers and electricity are located in the upstream or midstream links of the industrial chain, and they have close input-output connections with many downstream industries. The CBAM imposes carbon tariffs on high energy-consuming industries, directly increasing the export costs of these industries, leading to a decline in the price competitiveness of their products in the international market, and thereby reducing the output of these industries. The decline in the output of these high energy-consuming industries will directly reduce the demand for the upstream energy industry. As high energy-consuming industries consume a large amount of energy during the production process, when their output decreases, the purchase volume of energy will also decrease accordingly, thereby leading to a reduction in the output of the coal, oil and natural gas.

From the perspective of the demand side, investment, consumption and export are the “three horses” driving economic growth. The implementation of CBAM has hindered the export of high energy-consuming products and reduced export demand. This not only affects the high energy-consuming industries themselves but also spreads to other related industries through the industrial chain. For instance, a decline in the output of high energy-consuming industries may lead to a reduction in orders for related equipment manufacturing industries, thereby affecting the total output of the industries. Meanwhile, due to the large number of employed people in high energy-consuming industries, the decline in output may lead to a decrease in wage levels and a reduction in capital lease prices. A decrease in wages will affect the income level of residents and thereby suppress consumer demand. Although the reduction in capital lease prices will to some extent lower the production costs of the manufacturing industry and have a positive impact on it, due to the overall contraction on the demand side, this positive impact has gradually declined.

The service industry, as an important component of the national economy, is closely related to residents’ consumption and the operation of various industries. When residents’ income decreases due to the decline in the output of high energy-consuming industries, the demand for the service industry will also decrease accordingly. For instance, residents might reduce their consumption in service sectors such as catering, tourism and entertainment, thereby leading to a decline in the output of the service industry. The transportation industry is less affected, possibly because its demand sources are relatively extensive. It not only includes the transportation of high energy-consuming products but also involves the transportation of products from many other industries as well as residents’ daily travel, etc. Its demand is relatively stable, and the impact of CBAM on high energy-consuming industries is relatively limited.

4.2. The Impact of CBAM on Power Generation Structure and Electricity Consumption

The implementation of CBAM directly affects China’s energy consumption. In the first implementation stage, the emission reduction costs of high energy-consuming industries such as steel, cement, aluminum, fertilizers and electricity increased. Driven by market supply and demand and profit maximization, high energy-consuming industries may reduce output to cope with the decline in profits. The CGE model constructed in this study not only simulates the output value changes in key development industries such as manufacturing and transportation, but also further predicts and analyzes the future power generation situation of different energy types and the electricity consumption of various industries.

4.2.1. The Impact of CBAM on Power Generation

Figure 5a simulates the changes in the power generation of different energy sources in China from 2017 to 2060 under the baseline scenario. It can be observed that the power generation from coal-fired power plants has been on the rise until 2030 and has since continued to decline, while the power generation from clean energy sources such as nuclear power, wind power and photovoltaic power has been on the rise. This is mainly due to the fact that the “dual carbon” goals have provided policy support and development opportunities for wind and solar power generation. The government has introduced a series of encouraging policies, which have promoted the rapid development of the wind and solar power generation industry. Meanwhile, as can be seen from the total power generation data displayed on the right axis of Figure 5a, China’s total power generation has continued to rise during this period, which reflects the sustained demand for electricity due to the steady growth of the Chinese economy. With the acceleration of industrialization and urbanization, as well as the improvement of residents’ living standards, the demand for electricity consumption is constantly increasing, which has driven the growth of the total power generation.

The implementation of CBAM has raised the production costs of high energy-consuming industries, which will further force the power generation industry to upgrade and transform, and promote the increase in the proportion of clean power generation. In this paper, the CGE model is used to analyze the variation ratio of power generation. The simulation results are shown in Figure 5b. It can be observed that after the implementation of CBAM, photovoltaic power generation has shown a significant upward trend. By 2060, China’s photovoltaic power generation is expected to increase by approximately 0.25% compared to the baseline scenario. Meanwhile, the increase in production costs in high-energy-consuming industries has reduced the demand for power generation from traditional fossil fuels. Figure 5b shows that the proportion of changes in power generation from coal, oil and natural gas has decreased significantly after the implementation of CBAM, and the decline is expected to reach its maximum around 2035. Subsequently, with the stable development of China’s economy and the gradual adaptation to CBAM, the decline in the output of coal-fired power and gas power has narrowed, but the decline is still far less than the increase in photovoltaic and hydropower generation. This also indicates that under the influence of CBAM, China’s energy structure is accelerating its transformation towards cleanliness and sustainability.

4.2.2. The Influence of CBAM on the Power Generation Structure

The implementation of CBAM has led to significant changes in the power generation of different energy types in China and further affected the power generation structure. Figure 6 simulates the changes in the proportions of coal-fired power, gas power, hydropower, nuclear power, wind power and photovoltaic power before and after the implementation of CBAM.

From the demand side, the implementation of CBAM has had a multi-dimensional impact on electricity demand. On the one hand, this policy has led to obstacles in the exports of high-power-consuming industries such as steel and aluminum. Due to the obstruction of exports, enterprises have received fewer orders and their production scale has shrunk accordingly, which has directly led to a decline in the electricity demand of these industries themselves. On the other hand, as key links in the industrial chain, the reduction in output in industries such as steel and aluminum will further affect the upstream and downstream related industries. For instance, the upstream raw material supply industry has reduced its output due to decreased demand, and the downstream processing and manufacturing industry has also cut production because of raw material shortages or rising costs. This chain reaction eventually leads to a decrease in the electricity demand of the entire industrial chain.

From the perspective of power generation structure adjustment, the implementation of CBAM has had differentiated impacts on the proportion of power generation from different energy sources, especially reducing the proportion of power generation from fossil energy. As shown in Figure 6, after the implementation of CBAM, the photovoltaic power generation increased significantly, while the coal power generation decreased considerably compared to the benchmark scenario in the coming period. This is mainly due to the fact that under the impetus of policies, the development of clean energy has been further encouraged and supported. Driven by both technological progress and cost reduction, the competitiveness of the photovoltaic industry has been continuously enhanced, and thus its proportion in the power generation structure has gradually increased. The policy restrictions on high-carbon-emission energy generation have reduced the demand for coal-fired power. Overall, the implementation of CBAM has effectively promoted clean production by influencing electricity demand and driving the adjustment of the power generation structure.

4.2.3. The Impact of CBAM on Electricity Consumption in Different Industries

Figure 7 further simulates the changes in electricity consumption in coal mining, oil extraction, natural gas extraction, textile industry, transportation industry, manufacturing industry and service industry before and after the implementation of CBAM. It can be clearly observed that the electricity consumption in coal mining has risen, while the total electricity consumption in the manufacturing industry has decreased significantly. The total electricity consumption in other industries has not changed significantly.

The increase in electricity consumption in the coal mining industry may be attributed to the fact that CBAM has promoted technological upgrades and environmental protection renovations within the coal mining industry itself, resulting in a rise in electricity demand. The significant decline in the total electricity consumption of the manufacturing industry is mainly due to the cost pressure brought about by CBAM. This policy has imposed higher carbon tariffs on manufacturing products exported to the EU. To reduce production costs and enhance product competitiveness, enterprises have been taking energy conservation and emission reduction measures one after another. Many manufacturing enterprises have increased their investment in energy-saving technologies and equipment, optimized and upgraded their production processes, improved energy utilization efficiency, and thereby reduced electricity consumption. Meanwhile, some manufacturing enterprises with high energy consumption and high emissions have reduced their output or moved their industries to avoid policy risks, which has directly led to a decline in the overall total electricity consumption of the manufacturing industry.

Apart from coal mining and manufacturing, the production mode and energy consumption characteristics of the textile industry are relatively fixed. In the early stage of the implementation of CBAM, it has not been significantly impacted, and enterprises have not carried out large-scale energy-saving renovations or adjusted production scales. Therefore, the total electricity consumption has remained relatively stable. The electricity consumption in the transportation and service industries is mainly related to business volume and operation mode. The direct impact of CBAM on these two industries is relatively small. Without the interference of other major factors, the total electricity consumption has not changed significantly.

4.3. The Impact of CBAM on Carbon Emissions and Emission Reduction Costs

4.3.1. The Impact of CBAM on Carbon Emissions

CBAM encourages countries to introduce relevant policies to control carbon emissions and improve technological levels. Meanwhile, CBAM has a significant impact on countries and regions that export a large number of carbon-intensive products to the EU. As a major global carbon emitter, China’s economic level and carbon emissions are bound to be significantly affected by the CBAM. During the implementation of the CBAM, if the carbon intensity of China’s export products is comparable to that of the European Union, the CBAM tax rate will be 0. If the carbon emissions exceed the EU standards, taxes must be paid based on the difference. Therefore, the CBAM forces exporting countries to adjust their production carbon emissions through the price lever. According to existing research, CBAM can directly affect China’s export costs through the carbon tariff mechanism, force the upgrading of the domestic carbon emission management system, and promote the alignment of the national carbon market with the EU’s carbon pricing mechanism. The implementation of the CBAM policy has reduced the competitiveness of China’s export commodities, accelerated the formulation and implementation of China’s emission reduction policies, and thereby lowered China’s carbon emission levels [31].

Figure 8 simulates the changes in China’s GDP and total carbon emissions before and after the implementation of CBAM, respectively, under the benchmark scenario. It can be found that China’s GDP shows a rapid upward trend, while carbon emissions reach their peak around 2030 and then gradually decline. It is expected to achieve carbon neutrality by 2060. Meanwhile, it can be found that in 2026, which is the initial year of the implementation of CBAM, China’s total carbon emissions decreased significantly compared with the benchmark scenario. However, near 2060, due to the implementation of China’s carbon reduction policies, which reduced carbon emissions, the carbon emissions tended to converge before and after the policy shock. It was also found that under the impact of the CBAM, the peak of carbon emissions shifted to the left, enabling the achievement of carbon peaking ahead of schedule, and the peak decreased. This also indicates that the implementation of the policy has, to a certain extent, accelerated the process of carbon peaking and carbon neutrality. Furthermore, the left axis in the figure shows the development level of China’s GDP. The CBAM scenario has a smaller reduction compared to the benchmark scenario. Therefore, CBAM has not significantly affected the development level of China’s economy.

4.3.2. The Marginal Emission Reduction Cost of CBAM Implementation

In the process of responding to global climate change, carbon tariffs, as a new type of trade protection and environmental governance means, have attracted much attention. The implementation of CBAM is bound to have an impact on the production and operation of Chinese goods and foreign trade. Meanwhile, all the above-mentioned practices will bring additional costs to market entities, which is reflected in the macroeconomy as a decline in GDP. To measure the change in marginal emission reduction costs caused by CBAM, in this paper, the annual marginal emission reduction costs are obtained by dividing the degree of decline in GDP compared to the benchmark scenario by the decrease in total carbon emissions.

Based on the calculation results of the DCGE model and the calculation formula of the marginal emission reduction cost in the above formula, the marginal emission reduction cost of CBAM compared with the benchmark scenario is drawn as shown in Figure 9. It can be found that the marginal cost of emission reduction is gradually increasing, which also indicates that the decline in GDP is higher than that in carbon emissions. Therefore, while the CBAM reduces China’s carbon emissions, it also lowers the overall level of economic development.

However, compared with the existing carbon emission reduction measures (such as carbon trading mechanisms, CCUS technology applications, etc.), the emission reduction cost of CBAM is relatively higher. Specifically, ref. [32] used the CGE model to conduct a predictive analysis of the marginal emission reduction costs of emission reduction using CCUS technology under different carbon price scenarios. According to the research results, we found that although the marginal emission reduction cost showed an increasing trend year by year in each scenario. However, by 2060, the maximum value of the marginal emission reduction cost in all scenarios was only 1416.79 yuan per ton, significantly lower than the cost impact value brought by CBAM. Furthermore, ref. [33] simulated the changes in China’s marginal emission reduction cost from 2020 to 2030 under the background of the implementation of the carbon emission mechanism. The results showed that the maximum marginal emission reduction cost in 2030 was 426.05 yuan per ton, which was also significantly lower than the marginal emission reduction cost of CBAM. Therefore, the implementation of CBAM is not optimal for the development of China’s industries, and there are still alternative emission reduction solutions.

4.4. Research Comparison and Limitations

4.4.1. Research Comparison

This paper analyzes the impact of the implementation of CBAM on China’s macroeconomy, power supply and demand, and environmental benefits. Compared with existing studies, it provides a more detailed analysis of the mechanism by which CBAM affects a country’s power supply and demand and environmental benefits. Ref. [34] found that the implementation of CBAM might have an impact on economies. Affected countries might retaliate economically and reduce their exports to the European Union, which could further bring economic profits to other countries. At the same time, the implementation of CBAM may reduce the total carbon emissions of a certain country. However, in the global economy, the import of goods from the EU may be replaced by domestic goods, and this carbon emission impact is offset, which cannot effectively reduce the total global carbon emissions. This study mainly focused on the result analysis of the total carbon emissions, but did not comprehensively analyze the internal mechanism by which CBAM affects a country’s carbon emissions. This paper reaches consistent conclusions on the emission reduction effect of CBAM, but it places a more detailed research object on a single country and provides a more refined description of the main factors influencing a country’s environmental benefits. At the same time, from the perspective of production and trade costs, we have also found that CBAM is not the most effective carbon reduction measure for the world.

4.4.2. Limitations of This Study

This article explores how the implementation of CBAM affects China’s economic development and carbon emissions, and further analyzes the impact of CBAM on China’s total power generation and electricity consumption in various industries. However, during the research process, this paper has the following three limitations: Firstly, when studying the impact of CBAM on the total carbon emissions and the marginal cost of emission reduction, due to the availability of data, this paper did not conduct industry-specific exploration. Secondly, based on the proportion of CBAM free quotas, this paper analyzes the changes in China’s macroeconomy and carbon emissions before and after the cancellation of free quotas compared to the baseline scenario. However, the carbon emission quotas have been decreasing year by year, and this paper does not analyze the impact of carbon emission quotas year by year. Finally, in the model setup stage of this study, the global general equilibrium effect was not taken into account, such as the possible impact of global trade transfer on China’s economic development level.

5. Conclusions and Policy Implications

The combination of CBAM and China’s “dual carbon” goals has increased the complexity of the low-carbon transformation of foreign trade. This study is based on the dynamic evolution mechanism of CBAM and combines the input-output data of GTAP to conduct an in-depth analysis of the output and power supply and demand changes in various industries in China before and after the implementation of CBAM. Specifically, this paper constructs two scenarios, Benchmark and CBAM, and conducts simulations using the DCGE model. The main research conclusions are as follows: Firstly, from the perspective of China’s macroeconomic development, the implementation of CBAM will to some extent reduce China’s total GDP. Moreover, the decline in GDP will be the greatest when the free quota is completely abolished. After that, the overall impact of CBAM on China’s macroeconomy will slightly weaken. This indicates that CBAM will not only reduce China’s total economic income, consumption and investment levels to a certain extent, but also, respectively, lower the total income of households, enterprises and the government. Secondly, this paper assesses the impact of the implementation of CBAM on China’s power generation, power generation structure and carbon emissions. It is found that the implementation of CBAM has increased the proportion of photovoltaic power generation, reduced the total power consumption of the manufacturing industry, and accelerated the green transformation of the power generation structure. Finally, this paper calculates the annual marginal cost of emission reduction by calculating the ratio of the decline in GDP compared to the baseline scenario to the reduction in total carbon emissions. By a comparison with other emission reduction technologies, it is found that the marginal emission reduction cost brought by CBAM is the highest, and there are potential alternative emission reduction strategies.

Based on the discussion of the above content, this paper puts forward the following policy suggestions: First, focus on the five high energy-consuming industrial sectors of steel, aluminum, fertilizer, power and cement, intensify the development and innovation of clean technologies, and accelerate the green transformation of core technologies in these industrial sectors. Taking international advanced low-carbon technologies as benchmarks, we will carry out research and development on key core technologies for low-carbon and zero-carbon, and lead high energy-consuming industrial sectors to achieve low-carbon transformation first. Meanwhile, deepen foreign trade cooperation with third-world countries and developing countries. Adhering to the principle of “common but differentiated responsibilities”, on the basis of abiding by international contracts, actively carry out dialogue and communication with other countries, and strive to reach a consensus on carbon emission reduction targets. Second, give full play to the advantages of the large domestic market and build a new development pattern featuring “domestic circulation as the mainstay and domestic and international circulations reinforcing each other”. Deeply explore the potential of the domestic market, improve the construction of the domestic carbon market, and promote the mutual integration and mutual benefit of domestic and foreign carbon markets. Based on the new development pattern, we should promote the green upgrading of regional industrial chains in a targeted manner, facilitate the linkage of industrial chains through regional cooperation, and achieve win-win cooperation among regional economies through the green development of industrial chains. Third, actively carry out negotiations and explore diversified emission reduction strategies. Given that the implementation of CBAM may impose a relatively high marginal cost of emission reduction on China, and this cost pressure can be passed on to export enterprises along the trade chain, intensifying the risk of global industrial chain reconstruction. China should proactively participate in international carbon emission reduction policy negotiations and promote the establishment of a more cost-effective global emission reduction cooperation framework.