Implications of the EU's Carbon Border Adjustment Mechanism for Fertiliser and Food Markets

Abstract

Coherence in policy approaches across countries is crucial for achieving common GHG emission reduction goals at lower costs. Agro-economic models like Aglink-Cosimo, including global fertiliser markets, are useful for analyzing the anticipated effects of GHG reduction policies on food commodity markets. These policies can significantly affect domestic industry competitiveness, either positively or negatively. Such assessment tools can enhance evidence-based policy discussions and formation. We include in the baseline a EU ETS carbon price on fertiliser production in the EU as of 2026, without free allowances at 100 USD/tonne of CO2-eq emitted. Carbon pricing is assumed to be applied by the EU, Canada and the USA to fertiliser production from 2026 onwards. The results of the analysis presented in this article indicate that a Carbon Border Adjustment Mechanism (CBAM) significantly impacts fertiliser trade. A unilateral CBAM tariff affects EU fertiliser trade more than a common CBAM tariff adopted by a coalition of countries. These effects depend heavily on the volume of bilateral trade within club countries. Fertiliser markets influence commodity production and prices modestly due to the price inelasticity of fertiliser demand by farmers and the buffering role of trade in response to price shocks. In terms of GHG emissions, a climate club scenario results in lower total world emissions compared to a unilateral CBAM scenario.