Implications of the Carbon Border Adjustment Mechanism on South Korean industries: Challenges and policy recommendations

Abstract

This study examines the effects of the European Union's Carbon Border Adjustment Mechanism (CBAM) on South Korean industries. Concerns about carbon leakage, where carbon emissions increase in countries or regions with less stringent climate policies, have grown recently. Specifically, firms strategically relocate their operations to countries with lower carbon costs, where they can produce goods more cheaply and without carbon constraints. CBAM is a carbon tariff on carbon intensive products imported by the European Union. While the CBAM has the potential to reduce global carbon emissions, it poses significant risks to South Korea, which relies heavily on exports of CBAM-affected products. This study provides an overview of the potential effects of the CBAM on industries in South Korea, applies event study analysis to quantitatively evaluate how the financial market has reacted to CBAM-related events. Based on the research findings, as the details of CBAM become clearer, there is a shift in perception from environmental goals to broader issues across industries. Building on this understanding, we discuss issues related to the CBAM enactment: firm-level carbon accounting, EC-certified accreditation institutions, and the carbon allowance price gap between the EU and South Korea. We propose necessary short-term and long-term policies to attenuate CBAM-related risks.