Impact of the European Carbon Border Adjustment Mechanism (CBAM) on the German industry

Martinez, Juan Diego Article Impact of the European Carbon Border Adjustment Mechanism (CBAM) on the German industry Junior Management Science (JUMS) Provided in Cooperation with: Junior Management Science e. V. Suggested Citation: Martinez, Juan Diego (2024) : Impact of the European Carbon Border Adjustment Mechanism (CBAM) on the German industry, Junior Management Science (JUMS), ISSN 2942-1861, Junior Management Science e. V., Planegg, Vol. 9, Iss. 4, pp. 1964-1993, https://doi.org/10.5282/jums/v9i4pp1964-1993 This Version is available at: https://hdl.handle.net/10419/308473 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Nicolas von Bodman, The Impact of Prospectus Language on IPO Underpricing: A Textual Analysis of European IPOs Juan Diego Martinez, Impact of the European Carbon Border Adjustment Mechanism (CBAM) on the German Industry Mareike Polle, Reusable Packaging Systems for Restaurants and Delivery Services: A Study of Consumer Preferences and Adoption Barriers to Promote Public Acceptance in Germany Niklas Thomas Starz, Road to a Bioeconomy in the European Union: Mapping Drivers of Precision Fermentation Adoption Elisa Schulte genannt Kulkmann, In the Eye of the Beholder: Examining the Role of Dynamic Capabilities, Industry Dynamics, and Internal Knowledge Sharing in Strategists' Entry Decisions Saskia Hahn, Development of a Process Model for MissionDriven Corporate Rebranding Jakob Phillip Klar, A Cost-Effective Future for Electricity Storage - An Examination of LCOS Studies on Stationary Applications 1859 1901 1917 1934 1964 1994 2024 2050 2082 2118 Published by Junior Management Science e.V. This is an Open Access article distributed under the terms of the CC-BY-4.0 (Attribution 4.0 International). Open Access funding provided by ZBW. ISSN: 2942-1861 Impact of the European Carbon Border Adjustment Mechanism (CBAM) on the German Industry Juan Diego Martinez Technical University of Munich Abstract The European Commission’s proposal for a Carbon Border Adjustment Mechanism (CBAM) aims to address carbon emissions in imports to the EU. This thesis researches the financial implications for exporting countries due to CBAM’s implementation, focusing on how it may alter production costs, demand dynamics, and global trading relationships. Using a quantitative research approach, the study analyzes existing carbon market landscapes and Germany’s trade ties with non-European exporters in key sectors like iron, steel, aluminum, polymers and chemicals. It evaluates CBAM guidelines and assesses potential weaknesses in determining embodied CO2 emissions. Results suggest CBAM may not drastically shift production costs or demand patterns immediately. China, with inherent cost advantages, may maintain competitiveness, while India’s advantages could diminish by 2035. However, uncertainties persist on CBAM’s long-term impact on global trade dynamics. The analysis highlights CBAM’s uneven financial burden across exporters, influenced by energy structures and production technologies. Weaknesses in CBAM’s calculation methods are highlighted, recommending standardized guidelines to ensure accurate emissions reporting. This study prompts policymakers to evaluate CBAM’s effectiveness in meeting climate goals while maintaining global trade equity. Keywords: CBAM; carbon pricing; corporate ESG; decarbonization; European Carbon Border Adjustment Mechanism 1. Introduction The Sixth Assessment Report of the IPCC paints a sobering picture of the impacts of climate change already being witnessed, including humanitarian crises and irreparable environmental damage. According to the assessment, to prevent a 1.5◦C temperature rise, global emissions of greenhouse gases would have to fall by 43% by 2030. To achieve this, all sectors of the economy must rapidly reduce their emissions (IPCC, 2022). Late in 2022, world leaders congregated for the Conference of the Parties of the UNFCCC (COP 27), where they reinforced their pledge to prevent a 1.5◦C temperature rise. I extend my sincere appreciation on to Prof. Dr. Svetlana Ikonnikova for her valuable guidance and support during the development of my master’s thesis. Furthermore, I am forever grateful to my family for their unwavering support throughout my journey. According to analysis by the International Energy Agency (IEA), however, there is a considerable discrepancy between what nations have committed and what can be accomplished with the current implemented policy. Many nations require additional policies to reach their targets (IEA, 2021,2022b; UNFCCC, 2022). The European Commission, in an effort to expand its carbon pricing policy and reach its targets, released a proposal for a Carbon Border Adjustment Mechanism (CBAM) in July 2021. The CBAM basically involves imposing a carbon price to imports of specific products from non-European countries into the European Union (EU), proportionate to the items’ "embodied carbon dioxide (CO2) emissions," or the emissions of CO2created during their manufacturing. CBAM will initially cover several specific goods from some of the most carbon-intensive sectors, comprising iron and steel, cement, fertilisers, aluminum, electricity, and hydrogen, as well as some precursors and downstream products. DOI: https://doi.org/10.5282/jums/v9i4pp1964-1993 © The Author(s) 2024. Published by Junior Management Science. This is an Open Access article distributed under the terms of the CC-BY-4.0 (Attribution 4.0 International). Open Access funding provided by ZBW. J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1965 The aim of this thesis is to examine the potential financial repercussions that may arise from the implementation of the Carbon Border Adjustment Mechanism (CBAM) for exporting countries. The research seeks to estimate to what extent CBAM will affect the production costs of goods, leading to changes in demand and trading relationships between countries in both the short and long term. Specifically, the analysis will investigate whether the financial burden resulting from CBAM will be equitably distributed among all nations or if it will disproportionately affect major trading partners. To accomplish this, the study will analyze the current global landscape of the carbon market, including initiatives taken by non-European countries to price CO2emissions. Additionally, it will identify Germany’s trading relationships with non-European exporters of goods in the scope of CBAM. The study will focus on goods such as iron, steel, aluminum, and polymers, which are likely to have a significant impact, given Germany’s strong automotive industry. The analysis will also identify key characteristics of the CBAM guidelines and evaluate its weaknesses, with particular focus on the actual determination of embodied CO2emissions in goods. It will highlight the fact that without a standardized method for calculating embodied CO2emissions, the effect of CBAM may be diminished in the short and long term. To illustrate this point, it will calculate the embodied emissions contained in goods exported to Germany in 2021 using different methods and compare the results. Finally, this study will assess how the existing cost advantages of the major non-European trading partners of Germany will be affected by CBAM, depending on the method of calculation of embodied emissions in goods. It can be inferred that the production processes and technologies used in each country will have an impact on the individual financial burden of each country. The study will conclude by discussing potential shifts in demand for goods from one country to another and analyzing whether CBAM will have a significant effect on global trade. 2. Literature review 2.1. Carbon pricing Governments can utilize carbon pricing, a policy instrument, as part of their overall plan to reduce greenhouse gas (GHG) emissions, such as CO2. Once the CO2(referred to as “carbon”) emissions are priced, there is a monetary incentive to lessen them or promote removals. Carbon pricing can alter production, consumption, and investment patterns, therefore promoting low-carbon growth by factoring climate change costs into economic decisions. Carbon may be priced using a wide range of policy mechanisms, which can each be customized to local conditions, priorities, and demands. Carbon pricing’s climatic impact is determined by how extensively the price is implemented, the price level, and the availability of abatement possibilities (The World Bank, 2022). As of April 2022, there are 68 carbon pricing instruments (CPIs) operating worldwide. These are either carbon taxes or emissions trading systems (ETS). A carbon tax is a policy tool that allows a government to charge a levy for emissions. The overall volume of emissions in one or more sectors of the economy is controlled or capped in an emissions trading scheme. The government then sells or distributes tradable emission permits to entities subject to the cap. Each allowance reflects the right to release a specific volume of emissions, which is usually one metric ton of CO2-equivalent (tCO2e), and the overall volume of allowances equals the emissions cap. During a compliance period, organizations must surrender permits for their emissions. They can either purchase extra allowances as needed or sell surplus allowances. This strategy is also known as a "cap-and-trade" scheme (United Nations Committee of Experts on International Cooperation in Tax Matters: Environmental Tax Issues, 2020). The graph in Figure 1depicts the global carbon pricing systems in operation as of 2022, whereas carbon pricing schemes are regarded as "scheduled for implementation" until they have been legally established by law and have a clear start date. Carbon pricing efforts are categorized as "under consideration" if the government has proclaimed its intention to work toward implementing a carbon pricing program and this has been explicitly acknowledged by official government sources. The adoption of carbon pricing continues growing steadily in the Americas and Asia, but the global coverage remains low. Several jurisdictions, such as Brazil, Turkey or Taiwan continue to assess the potential to implement the CPIs. Implementing carbon prices remains a policy challenge, especially given rising energy commodity prices coupled with current geopolitical issues and the ongoing COVID-19 pandemic’s impact on economies. The European Commission estimates the proportion of global emissions covered by the CPIs in operation to be approximately 23% (Joint Research Centre (European Commission), 2022). The largest carbon market, by traded value, is the European Emissions Trading System (EU ETS). It was launched in 2005 as a major pillar of the European energy policy and was quickly followed by counterparts in New Zealand (NZ ETS), South Korea, California and the RGGI. The Regional Greenhouse Gas Initiative is abbreviated as RGGI1. Over the past years, carbon prices have reached record highs, as shown in Figure 2. Following a combination of policy decisions, increased speculation, and broader economic trends - particularly global energy prices – it is fair to conclude that carbon prices react to market conditions. The spikes in the different ETS prices have been driven by more ambitious climate targets and reforms. Germany, the EU ETS’s largest emitter, successfully deployed its domestic energy ETS on January 1, 2021, at a fixed 1The Regional Greenhouse Gas Initiative (RGGI) is a cooperative, marketbased effort among the US states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia. J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931966 Figure 1: Map of carbon taxes and emission trading systems operating worldwide as of April 2022 (The World Bank, 2022) Figure 2: Price evolution in selected ETS, 2008-2021 (International Carbon Action Partnership, 2022) fee of 25 euros per tonne CO2equivalent, with the sale of National Emissions Trading Scheme (nEHS) permits beginning in October 2021. All energy emissions that have not been regulated by the EU ETS (primarily heating and transport transportation) have been included. Such emissions are released by a range of sources, including heating, oil, natural gas, petrol, and diesel. Some fuels (such as coal and garbage) will be phased in later in 2023. From 2021 to 2025, the nEHS will be brought in progressively, with a set price on emission allowances. The set price will continue to climb over time. After that, allowance pricing will be determined by the market beginning in 2027. The cap on the emissions is based on Germany’s mitigation goals for industries not covered by the EU ETS (Bundesministerium der Justiz, 2021; The World Bank, 2022). Germany’s domestic ETS and the EU ETS mirror a reality that all CPIs share, namely that its prices remain below what is required to meet the Paris Agreement’s goals. According to the High-Level Commission on Carbon Prices, CPIs should range between 70-100 €/tCO2e to keep global warming to below 2◦C by 2030 (Stiglitz & Stern, 2017). Newer estimates indicate that even higher prices may be needed to reduce J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1967 emissions to net zero by 2050, as required by the IPCC to reach the 1.5◦C target. A poll of 30 environmental analysts conducted in 2021 estimates that prices ranging from 70 to 250 USD per tCO2e would be required to meet this objective, with an average estimate of 100 USD per tCO2e (Bhat, 2022). The current state of carbon pricing worldwide reflects the gap between policy and commitments reported by the IEA. In most countries, higher carbon pricing and a further set of complementary policy actions will be required to meet both short-term mitigation targets and long-term net zero policies. This is especially true for promoting decarbonization in complex, energy-intensive sectors, where low-carbon technologies are underdeveloped (IEA, 2022b). 2.2. Carbon Leakage and the Carbon Border Adjustment Mechanism (CBAM) As governments expand their carbon pricing aspirations, carbon leakage becomes a growing concern. Carbon leakage refers to the possibility that reduced emissions in one state will be reversed by higher emissions in another. This might be caused by increased output or relocation to a state with less rigorous emission regulations. Carbon leakage holds the potential to harm GDP, jobs, and tax revenue in the most audacious states, creating a deterrent to act. It also decreases the effectiveness of environmental legislation by relocating emissions to countries with poorly enforced regulations, potentially leading to an increase in global carbon emissions (Aichele & Felbermayr, 2015). To date, there is little empirical evidence of carbon leakage. An econometric investigation of carbon leakage caused by the EU Emission Trading Scheme (ETS) on the cement and iron and steel sectors discovered no indication that the EU ETS has had any impact on net imports in these energyintensive industries, arguing that so far, most jurisdictions have responded to leakage concerns by granting exemptions, refunds, or free allocation of allowances to sensitive sectors. These approaches have downfalls, however. Decreasing the carbon price weakens the motivation to use resources more efficiently or the switch to lower-carbon technologies and products (Chevallier et al., 2017; European Parliament and European Council, 2003; Felbermayr, 2020). According to the OECD, overall carbon emissions embodied in international trade have increased by about 50% between 1995 and 2018. China, the United States, India, the Russian Federation, Japan, and Germany were the six greatest producers and consumers of carbon emissions in 2018, as shown in the Figure 3. While emissions production and consumption have decreased in Japan, Germany, and the European Union (EU27) since 1995, there has been a large growth in China and India. China has the biggest absolute emissions, both in terms of consumption and production. While the OECD countries shown (United States, Japan, and Germany), in total, are net-importers of embodied carbon, the non-OECD countries shown (China, India and the Russian Federation) are netexporters of embodied carbon emissions. Numerous countries are examining trade measures to mitigate any possible carbon leakage caused by carbon pricing. One of those measures, proposed in academic and policy literature, is Border Carbon Adjustments (BCAs). BCAs address such worries about carbon leakage by employing trade mechanisms to guarantee that products from overseas manufacturers facing lower (or no) carbon costs are treated equally with domestically produced commodities. Despite its intuitive economic appeal, BCAs pose difficult regulatory decisions, including its scope of applicability (i.e., which policies, goods, sectors and countries), the methodology for assessing the carbon content of products, the type and price of the adjustment, and how the resulting revenues will be used. Any BCA must be designed in accordance with international accords controlling trade and climate policy duties (Cosbey et al., 2019; Horn & Mavroidis, 2011). BCAs generate important questions about the accountability for climate action. Indeed, the principle that countries have a common but differentiated responsibility to tackle climate change, has long been rooted in global climate cooperation. Developing countries claim that wealthier countries that implement BCAs affect trade by unilaterally imposing carbon pricing on manufactured goods. On the other hand, there are calls for industrialized nations to accept responsibility for their consumption’s carbon footprint, which a BCA would help to achieve (Ranjan Mishra, 2021; United Nations Conference on Trade and Development (UNCTAD), 2021). The European Commission released its proposal for the CBAM in July 2021 and reached an agreement after revising it in December 2022. The CBAM is part of the EU’s action plan, “Fit for 55”, which seeks to reduce European emissions by at least 55% by 2030 and achieve net zero emissions by 2050 while ensuring competitive strength and avoiding carbon leakage. As previously mentioned, the CBAM basically involves imposing a carbon price to imports of specific products into the European Union–, proportionate to the items’ "embodied emissions," or the emissions of greenhouse gases created during their manufacturing, as per draft regulations issued in July 2021. According to Article 21 of the CBAM regulation proposal, importers of included goods will be obligated to acquire emission certificates in relation to their embodied emissions. The price of such certificate would be equal to the price of EU ETS allowances. CBAM will initially cover several specific goods from some of the most carbonintensive sectors, comprising iron and steel, cement, fertilisers, aluminum, electricity, and hydrogen, as well as some precursors and a small selection of downstream products, according to the first Annex of the regulation. CBAM will begin operations in October 2023, and initially, a simpler CBAM between 2023 and 2025 will apply to reporting obligations. The CBAM is designed to progressively replace the existing free allocation of permits as the primary mechanism under the EU ETS to address carbon leakage. The method will be phased in proportionally to the phase-out of the present free allocation, according to Article 31 of the proposed CBAM draft. Importers of such goods can minimize or at least lessen prospective CBAM expenses. According to Article 9 of the CBAM J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931968 Figure 3: Production and consumption of embodied emissions in international trade per country, 1995 vs. 2018 (Organisation for Economic Co-operation and Development, 2021) regulation proposal, goods that are subject to a direct carbon price (i.e. a carbon tax or ETS) in their country of origin are eligible for a rebate equal to the price already paid prior to export. In that way, according to EU regulating bodies, the CBAM will ensure a balanced treatment of such imports and it will encourage trading partners around the world to join the EU’s climate efforts (European Commission, 2021; European Council, 2021; Pausch-Homblé, 2022). Recent studies addressing CBAM outcomes suggest that, if implemented widely, it will reduce greenhouse emissions, thus being beneficial in terms of decreasing global warming (Balistreri et al., 2019; Clerc et al., 2021; Eugster, 2021; Kahn et al., 2019). On the other hand, legal challenges and trade conflicts are to be expected. The CBAM’s compliance with the trade laws of the General Agreement on Tariffs and Trade (GATT) is not secured. Contrary to the EU’s justification, the international community perceives CBAM as a significant barrier to trade camouflaged as a mitigation policy, claiming that the CBAM also violates the trade principles of the World Trading Organization (WTO). The CBAM may boost prices of goods, causing perhaps another trade disruption and affecting developing countries (Appunn & Wettengel, 2023; Dias et al., 2021; Gläser et al., 2021; Lim et al., 2021; Lowe, 2021; Sapir, 2021). Although some lawmakers have advocated for CBAM exemptions in least developed countries, others argue that doing so would decrease the effectiveness of the mechanism. There is an alternative approach to fostering equity by using CBAM revenues to provide low-carbon development assistance to developing countries. While the initial EU proposal involved allocating the revenue to the EU budget, lawmakers agreed that the revenue will be redirected to least developed countries to offset the costs that the mechanism imposes on them, according to Article 24a of the updated CBAM proposal from December 2022 (Gore, 2021; Incir, 2022). In July 2021, a survey of major German stakeholders including businesses, civil institutions, and research revealed that there is considerable support for CBAM and an anticipation that the mechanism will be eventually implemented. Industry stakeholders supported continuing the free allocation of allowances, refunds for EU exporters and using profits for domestic spending. Meanwhile, civil institutions rather favor phasing out free allocation, exempting low-income countries and countries without climate policies, and using revenues to fund the green transition in low-income countries (Kuehner et al., 2022). Figure 3, which depicts the production and consumption of embodied carbon emissions in international trade by country, presents China, the United States. Russia, Japan and India as the countries with the highest amounts of produced and consumed emissions. These countries are highly likely to have large production industries in energy-intensive production sectors, which are targeted by CBAM. It can be deduced, therefore, that such countries may play a significant role as top trading partners for Germany’s imports of CBAM goods, as their products are in high demand globally (World Trade Organization, 2022). China, for example, is the world’s largest producer of steel and aluminum, and it also has an enormous capacity for chemical and polymer manufacturing. Similarly, the United States is the world’s greatest producer of natural gas and a substantial manufacturer of aluminum and steel, while Japan has a considerable capacity for high-quality steel and chemicals. India is also becoming a significant producer of iron and steel, chemicals, and polymers (International Aluminum Institute, 2023; Japan External Trade Organization - JETRO, 2022; U.S. Energy Information Administration, 2022; World Steel Association, 2023). 2.3. CO2emissions embodied in CBAM goods There is a further issue that has not been brought under the spotlight yet. The CBAM requires the development of methodologies to estimate the emissions embodied in goods. Importers of CBAM goods will be obligated to acquire emission certificates in relation to their embodied emissions. Ac- J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1969 cording to the CBAM proposal, embodied emissions of goods may be based on real emissions reported and validated by accredited verifiers or using default values, where importers are unable to demonstrate actual emissions. The use of default values may be problematic, as there are different approaches to determine such values. The following chapter discusses in detail this issue (European Commission, 2021). According to Article 7 of the CBAM, embodied emissions in goods shall be calculated pursuant to the methods set out in its third Annex. The third Annex stipulates that embodied emissions of goods are to be based on real emissions or using default values. If real monitoring values for emissions cannot be supplied, a default value is used. The third Annex further determines that “only real values from the country where actual emissions occurred must be used as default values. In the absence of actual, country specific values, literature values may be used. Literature values shall be determined based on the best available data” (European Commission, 2021). Default values, whether country specific or taken from literature, can be deliberately set lower than the likely embodied emissions. Exporters of goods could then benefit from the failure to provide reliable data on actual emissions, using default values and avoiding a major financial burden. The EU argues that “default values shall be set at the average emission intensity of the 10% worst performing installations in each exporting country and for each of the goods listed in Annex I other than electricity, increased by a mark-up, the latter to be determined in the implementing acts [of the CBAM]. When reliable data for the exporting country cannot be applied for a type of goods, the default values shall be based on the average emission intensity of the 5 % worst performing EU installations for that type of good” (European Commission, 2021). To the greatest degree practicable, “best available data” used for default values should be based on accurate and publicly accessible information on the type of technology and methods utilized, energy source, and input materials. It is further determined in the third Annex that “default values shall be updated on a regular basis, depending on the most recent and trustworthy information. The EU also promises to “publish [additional]guidance for the approach taken to adjust for greenhouse gases used as process input”. In the updated version of the CBAM it is clearly stated that “under no circumstances shall default values be lower than the likely embodied emissions and the exporter shall not benefit from the failure to provide reliable data on actual emissions so that default values are used”. Although the calculation of embodied emissions seems accurate at first sight, the third Annex of the CBAM is, until this point in time, vaguely formulated. The exact methodology to calculate embodied emissions based on actual data or available literature still must be developed. (Carbon Market Watch, 2021). 3. Methodology 3.1. Outline The research approach of this thesis employs a quantitative research method, as the embodied emissions of goods can be measured. The study relies primarily on secondary data, utilizing existing quantitative data rather than collecting new information. However, original quantitative data is generated through the analysis of secondary sources, including legal texts and press releases related to the Carbon Border Adjustment Mechanism (CBAM). All data used in the study is publicly accessible and external to the research project. This thesis builds a model, on an Excel basis, to determine to what extent CBAM will impact the trading patterns of exports and imports between Germany and non-European countries. It seeks to determine if the financial burden of CBAM is unevenly distributed across exporters and determined by each country’s energy production structure. To do so, the research is subdivided into individual research steps, shown in Figure 4. The research commences by examining the EU’s Carbon Border Adjustment Mechanism (CBAM) to establish the model’s boundary conditions. The objective is to quantitatively replicate the legislative framework, ensuring that all calculations adhere to the specified regulations (see 2.3). Subsequently, considering the CBAM rules and boundary conditions, trade statistics from the German Federal Statistical Office are utilized to determine the traded value, volume, and trading partners associated with CBAM goods (see 3.3.1). The next step consists in calculating the embodied emissions using the previous step and data from the OECD on intensity of emissions (see 3.3.2). The results from the third step are then compared in the fourth step of the research, by using data from the IEA and the USGS on the metal industry (see 3.3.3). All data is then validated with literature values and values from existing calculation models, such as the GHG Protocol Tool in the following step (see 3.3.4). The last step of the research analyzes the potential impact of the proposed CBAM on Germany’s demand for energyintensive goods, such as metals, as well as the impact on its major trading partners (see 3.3.5). 3.2. Data collection 3.2.1. Trade statistics The International Monetary Fund’s Dissemination Standards Bulletin Board (DSBB) allows users to access online datasets for all available categories for a country, even if compiled by multiple statistical agencies. The DSBB comprises data for Germany throughout the different sectors of its economy, such as the financial, the fiscal and the external sector. The latter one describes the features related to the economic interaction with other countries, such as balance of payments, external debt, and merchandise trade (International Monetary Fund, 2015). J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931970 Figure 4: Research steps (above) and used data sources (below) in each step (Own illustration, 2023) Statistics in Germany about merchandise trade are collected by the Federal Statistical Office. The goal of merchandise trade statistics is to track the movement of goods across borders between Germany and other nations. Since 1993, German merchandise trade data has been divided into two categories, Extraand Intra-EU trade statistics. The quantities and values of imported and exported commodities are published primarily broken down by commodity types and countries. The classification of commodities used for reporting imports and exports is the European Customs nomenclature, published in Germany as Warenverzeichnis (WA) (Federal Statistical Office (DESTATIS), 2019). The first Annex of the CBAM specifies exactly which traded goods are targeted according to its nomenclature, as seen in Table 1. The Federal Statistical Office provides data on each imported good individually, according to its specific nomenclature. As determined in the first Annex of the CBAM, there are (initially) 104 goods included in the CBAM. The data on imports is presented as a monetary value, in accordance with international standards. The value of each good is based on its entry value at the German border. Generally, it is derived from the invoice value with some adjustments for transport costs. Tariffs and taxes or other charges which have been levied on import or export are not included in the statistical value. The yearly cumulated sum of imports, in thousand euros (T€), is provided for each country. Additionally, the yearly cumulated weight sum of each good is also provided in tons. 3.2.2. OECD TECO2database The Organization for Economic Cooperation and Development (OECD) is known as a statistical agency that compares policy experiences and coordinates domestic and international policies. Since 2014, the OECD publicly releases its main statistical databases on subjects such as agriculture, population, and economic projections from industry and services. The Structural Analysis (STAN) database offers insights on industrial performance across nations. It comprises yearly measurements of production, labor input, and investment. In the framework of this research, the Input-Output Tables (IOTs) of the STAN database provide helpful information. IOTs explain the sell and purchase interactions that exist within an economy between producers and consumers and show flows (sales and purchases) of final and intermediate commodities and services (Organisation for Economic Co-operation and Development, 2018). More recently, the OECD merged the 2021 version of the Inter-Country Input-Output (ICIO) tables with the IEA’s statistics on carbon emissions from fuel combustion to estimate the distribution across economies of final demand for embodied carbon that has been emitted along global production chains. Using information from both databases, the emission intensity of production is calculated for each industry in each country. In that way, the Trade in Embodied CO2(TECO2) database presents a set of indicators to identify patterns of carbon demand and carbon production in each nation. The database includes indicators such as carbon emissions based on production (emitted by countries), emissions embodied in domestic final demand (consumed by countries), net exports of carbon emissions and the country origin of emissions in final demand. Policymakers, such as the EU, profit from such insights into the environmental implications of global industrial systems. The impact of international trade can be measured by allocating emissions to consuming and producing nations, thus disclosing whether nations are lowering or growing their emissions in production and consumption processes (Yamano & Guilhoto, 2020). 3.2.3. IEA World Energy Statistics and Balances The IEA compiles data on energy commodities such as oil, natural gas, and coal to publish yearly information books on specific fuels. Such commodity balances are presented in a simple way, by presenting all the data in comparable physical units. This could be joules or cubic meters for natural gas or tons for coal, for example. Yet such commodities are consumed for their energy content and can be transformed into one another through different processes. Simple commodity balances must be integrated to create an overall view of the energy system. Energy balances fulfill this task by showing how one product is turned into another. Such balances highlight the many links between energy commodities and demonstrate how all sources of energy are consumed (Márquez Alberto & Villatoro Flores, 2022; Millard & Quadrelli, 2017). In an energy balance, data elements on different commodities appear in a common physical unit. It enables, in the J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1971 Table 1: Statistical nomenclature of CBAM goods (Federal Statistical Office (DESTATIS), 2019) CBAM good category and abbreviation Statistical nomenclature (Warenverzeichnis) A: Aluminum WA76xx C: Cement WA2523xx CH: Chemicals WA29xx; WA280410 and WA2814xx E: Electricity WA271600 F: Fertilisers WA3105xx IS: Iron and Steel WA72xx and WA73xx P: Polymers WA39xx framework of this research, to see the total amount of energy consumed and the relative contribution of each source for the economy as a whole and for each sector of consumption. It also allows for the determination of energy transformation efficiencies, the development of aggregate indicators, and the forecasting of carbon emissions from fuel combustion (EUROSTAT, 2018). An energy balance may also be used to visualize the energy system using Sankey charts. The key data of an energy balance is the Total Primary Energy Supply (TPES), the Total Final Consumption (TFC) and the electricity generation by fuel type. The TPES measures the total supply of energy available for use in a country, while the TFC shows the energy that is used by final consumers, namely the energy used in households, transport, and businesses. Data on electricity production reflects the relative importance of each energy source in the generation mix. In the TFC, the product “electricity” comprises electricity generated from all energy sources, but in the TPES, just the appropriate primary equivalent quantity for each generation source is included (EUROSTAT, 2020). Industry, transport, and the other sectors (mainly residential) are fed by energy sources such as oil and oil products, coal, natural gas, electricity, and biofuels. Oil and oil products are the major source of energy consumed, primarily in the transport sector, amounting to roughly 40% of the TFC. The industry sector, worldwide, consumes energy mainly in form of coal, natural gas and electricity. The obtained information from the IEA will be further used to estimate the embodied emissions of goods, for each country, based on their TFC. 3.3. Research methods 3.3.1. CBAM goods traded to Germany and trading partners Determining the trading quantities and top trading partners for CBAM goods is of relevance in understanding the embodied emissions of the imports. Production of the same good in different countries can have vastly different carbon footprints due to differences in energy generation matrix, production processes, and regulations. By identifying trade nations and quantities, the embodied emissions of items may be calculated more easily. Furthermore, identifying the top trading partners can guide Germany in strategizing its trade policies and promoting sustainable trade practices. The government may collaborate with its trade partners to minimize carbon emissions from goods production and foster a more sustainable global economy. Additionally, Article 9 of the CBAM specifies that a reduction in the number of CBAM certificates will be surrendered if the carbon price paid in the country of origin for the declared goods is considered. This means that importers can lower their CBAM liability by providing evidence of the carbon price paid in the country of origin. To calculate the reduction in the number of CBAM certificates to be surrendered, a methodology is required, which includes the conversion of the carbon price paid in foreign currency into Euros at the yearly average exchange rate. Therefore, knowing the country of origin and the carbon pricing policies in those countries is critical to accurately calculate the CBAM certificates and to implement the CBAM effectively. The first step of the analysis consists in generating a matrix that comprises all CBAM goods imported and all the exporting countries. The German Federal Statistical Office, in compliance with the Federal Foreign Office, includes 262 countries, some of which are no longer one country, such as the Soviet Union or Yugoslavia. Furthermore, there are countries listed as confidential or “not determined”. To account for this, the analysis filters out all countries that did not export even a single unit of CBAM goods to Germany during the period of 2012 to 2021. According to the second Annex of the CBAM, the adjustment mechanism does not apply for the 28 country members of the EU, including the recently joined Croatian Republic. Additionally, the regulation does not apply to goods originating from Iceland, Liechtenstein, Norway and Switzerland. After filtering out all irrelevant countries the matrix comprises 122 exporting countries. The matrix of exported CBAM goods per country uses the latest (2021) and the earliest (2012) data available, to compare the recent development of trade2. The analysis continues by breaking down the CBAM goods per trading partner, considering the CPIs of the countries of origin of the goods. The goal is to prioritize the detailed calculation of embodied emissions of those trading partners with the highest financial impact, based on the traded value and/or CPI. 2There is no data available before 2012 for all the 122 countries listed in this matrix for all CBAM goods J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931978 Figure 11: Principal imported good per group according to its imported value, 2021 (Federal Statistical Office (DESTATIS), 2022b) steel is a highly advantageous material for use in the construction industry due to its strength, durability, versatility, cost-effectiveness, sustainability, and fire-resistant properties (Wirtschaftsvereinigung Stahl, 2021). From the group of polymers, the dominant good imported is plastic in sheets and plates. It accounts for 16% of all imports of polymers and 5,2% of all CBAM goods. According to the Federal Customs Service, plastic in sheets and plates is an overall term that encompasses additionally film, foil and strip of unfoamed plastics, mostly out of polyethylene. Polyethylene is extensively used in the packaging, construction, and automotive industry. In the packaging sector, it is employed to produce bags, films, and containers for a range of products, including food and beverage and medical supplies. In construction, polyethylene is utilized for pipes, wire and cable insulation, and insulation for buildings. In the automotive sector, it is used for fuel tanks, hoses, and electrical components (Arbeitsgemeinschaft Verpackung und Umwelt, 2022). Ultimately, the top three group of products in CBAM imports to Germany in 2021 – polymers, iron and steel, and aluminum – are all critical materials for sectors such as packaging, construction, and the automotive industry. Because of their adaptability, these materials are appropriate for a variety of applications in many areas. Germany’s huge manufacturing economy is strongly reliant on these commodities, and the country’s strict environmental standards require the use of high-quality raw materials. In the context of emissions trading, it is important to note that many specific emission intensity factors are calculated based on the production of a certain number of tons of a given product. As a result, when trading emissions, the trading volume in tons, in addition to the traded value, becomes an important indicator to convey. Because the quantity of emissions released is directly related to the volume of a manufactured product, trading volumes in tons serve as a significant measure of the overall emissions produced by a certain industry or sector. Both the traded value and the trading volume in tons must be considered, as these two metrics provide complementary information that, when combined, provides a more complete picture of the emissions generated. By taking both elements into account, it is feasible to precisely quantify the environmental impact. The graph in Figure 12 displays the traded quantities of CBAM goods in 2021 and 2012 (striped) in Mt. The data presented reveals that the volume of aluminum traded in tons increased by less than 10%, while the traded value increased by over 40% in the last decade, suggesting a significant shift in the pricing dynamics of this commodity over the period under consideration. Furthermore, the volume of steel traded in tons increased by 10% over the given period, while the traded value increased by 35%, indicating a substantial rise in the price of steel and iron. According to the figures shown in Figure 12, the growth in traded value between 2012 and 2021 does not follow a proportionate connection with the increase in traded volume in tons. This disparity raises the question of how much goods’ prices have changed in the recent decade, as a rise in traded value does not always imply an increase in the actual number of items traded. Based on data from the Federal Statistical Office, the graph in Figure 13 shows the price shift of the CBAM goods from 2012 (striped) to 2021 in Euros per ton (€/t). The price of polymers rose drastically from 2012 to 2021 due to various factors such as increasing demand, rising production costs, and fluctuations in the price of raw materials. Additionally, supply chain disruptions caused by natural disasters and the COVID-19 pandemic also contributed to the rise in polymer prices. The price of polyethylene, the most widely used polymer, rose by more than 150% from January 2012 to December 2021 due to the factors mentioned above (Independent Commodity Intelligence Services, 2023) (Independent Commodity Intelligence Services, 2023). Further research out of the scope of this thesis is needed to identify how price variations have influenced trade volumes and val- J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1979 Figure 12: Import of CBAM goods to Germany, 2012 (striped) vs. 2021 (Federal Statistical Office (DESTATIS), 2022b) Figure 13: Price shift of CBAM goods, 2012 (striped) vs. 2021 (Federal Statistical Office (DESTATIS), 2022b) ues, and how these trends may affect the larger economic environment in the future. The top 15 countries that exported the highest amount of CBAM goods to Germany in terms of traded value in billion Euros are shown in Figure 14, with data comparing the years 2012 and 2021 (to contrast changes of exports in one decade). The countries listed exported, together, 89.4% of all CBAM goods in 2021. As expected, the first country on the list is China, that exported 4,5 B€worth of CBAM goods to Germany in 2021, compared to 2,2 B€in 2012. This represents an increase of 104,5% in traded value. China alone exported in 2021 almost a quarter (22,8%) of all CBAM goods to Germany. Second is the United States, that exported 2,9 B€to Germany in 2021, an increase of 38.1% in traded value compared to 2012. Third is the United Kingdom, which surprisingly reduced its exports to Germany, decreasing 28.4% of its traded value. It is possible that the Brexit referendum in 2016 may have negatively affected the trade relationship between the United Kingdom and Germany. Uncertainty about future trade agreements and regulations may have led to a decrease in confidence and investment, which could have impacted exports. This, however, should be fully researched and is only one of many possibilities. Fourth on the list is Russia, which exported 1,8 B€to Germany in 2021, an increase of 38,5%. Turkey closes the Top 5 exporters, increasing its traded value by 114.3% in a decade. Roughly two thirds of all CBAM goods imported to Germany were produced by the Top 5 countries. Ultimately, the data in the graphic suggests that there has been a significant increase in traded value for CBAM goods from most of the countries in the list J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931980 between 2012 and 2021, with some countries experiencing more notable increases than others. Figure 14 is of great significance as it further reveals a key aspect of the CBAM. As per the data provided by the World Bank in Figure 1, some of the top trading partners do not have any form of CPI, which puts them in a vulnerable position. These countries will bear the full financial burden of CBAM, according to Article 9, implying that goods that have not paid any kind of carbon fee in their home country will not receive any rebate or discount, a costly affair for these trading partners. As a result, big emerging markets such as Russia or Turkey may suffer more from the implementation of CBAM than countries like the UK or the United States. India, Taiwan, and the Arabian Peninsula will face a higher burden due to the lack of a carbon pricing system than Japan, Korea or South Africa. However, it should be noted that this statement assumes that all trading partners have similar emissions intensity of production, which is not the case (see Chapter 4.2). The Table 4shows the trading partners that have a carbon pricing mechanism, indicating the current price of one unit and the rebated price certificate per CBAM. The rebated price of the CBAM certificate is calculated by subtracting the domestic price of each CPI from the current price of one emission certificate in the EU ETS, according to Articles 21 and 31 of the CBAM. The current price of a CBAM certificate is set to 100 euros per ton of CO2, based on data from the World Bank (The World Bank (IBRD and IDA), 2022). The selected countries for the analysis thereafter, according to the methodology presented in 3.3.1, are highlighted. China and the United States are particularly selected for further analysis due to its massive trade value with Germany. Although both countries already implemented a domestic CPI and have rebated CBAM prices, it is expected that both countries carry an additional financial burden from CBAM. Great Britain is, in contrast, not considered, as its domestic CPI has equal prices per certificate than those assumed for CBAM. Russia and Turkey are interesting countries as both have neither implemented nor considered a domestic CPI (to the current standing) and display a similar traded value. Korea and India are also considered to compare the impact of a domestic CPI, which Korea has and India not, on countries with similar traded value. The chart in Figure 15 reveals the traded volume per group of CBAM goods in 2021 of the trading partners considered. China emerges as the most prominent exporter of iron and steel and chemicals. The United States, similarly to China, export the most considerable share of polymers and a considerable share of chemicals. This may indicate different advantages or disadvantages in the production costs structure of each country, that lead to higher costs per unit and thus a lower demand from Germany. Meanwhile, Russia appears to be the greatest producer of aluminum and fertilisers. Turkey competes with Russia for the biggest share of aluminum production while Korea exports mostly polymers to Germany. India exports mostly chemicals and iron and steel. 4.2. CO2emissions embodied in traded goods according to OECD TECO2 The chart in Figure 16 compares the results of the CO2 emissions embodied in the metal sector per exporting country for the year 2021, depending on the intensity factor of CO2 emissions used (see 3.3.2). The chart clearly shows that China is the largest producer of emissions in the metals sector, which is not surprising given the traded value of its iron, steel and aluminum products and the high intensity of its emissions. In fact, China’s emissions are higher than any other country included in the analysis. Russia follows behind as the second-largest producer of emissions in the metals sector, with emissions levels very similar to China’s when comparing the factor [D24T25]. Overall, it is noticeable that the results of the analysis follow a consistent pattern per country, with the embodied emissions calculated using the intensity of emissions for basic metals [D24]being the highest, followed by [D24T25],[D25], and then [DTOTAL]. The most surprising aspect of this chart is that, except for China, the embodied emissions are nearly identical between all countries based on both factors [D24T25]and [D24]. Particularly in the cases of Russia and the United States the results are practically indistinguishable. However, the case of China stands out, as iron and steel emissions according to [D24]alone exceed all emissions based on [D24T25]. Furthermore, the overall result varies by almost 2 MtCO2e in the case of China. The graphs in Figure 17 clearly illustrates the difference between China and all other countries compared. The Figure 17 provides evidence that in countries other than China and India, the variables [D24T25; D24]and [DTOTAL; D25]exhibit a consistent pattern and are approximately equal. However, in the case of China and India, these variables range without any discernible similarity. It also reinforces the statement that the CBAM will pose an uneven financial burden on exporters, evidencing that China, Russia and India will have to bear the greater burden as, for example, a million USD worth of iron and steel exported will generate twice or even thrice as much emissions as the same unit produced in the United States or Turkey. This, however, does not necessarily imply that demand and production will shift, as the individual structures of the production costs must be considered as well. A million dollars’ worth of a product in a country does not automatically contain the same produced volume than the same unit in another country. Price dynamics and price shifts, as mentioned above, play a significant role. The intensity of emissions portrayed in Figure 17 above must be, therefore, validated and compared with other methods of calculating embodied emissions. The chart in Figure 18 compares the results of the CO2 emissions embodied in chemicals, polymers and fertilisers per exporting country for the year 2021, depending on the intensity factor of CO2emissions use. The chart shows that China is the largest producer of emissions in this sector as well. China’s emissions are again higher than any other country included in the analysis. The United States follows behind J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1981 Figure 14: Top CBAM trading partners of Germany, 2021 vs. 2012 (Federal Statistical Office (DESTATIS), 2022b) as the second-largest producer of emissions. Overall, it is noticeable that the results of the analysis follow a consistent pattern with smaller deviations per country. The embodied emissions calculated using the intensity of emissions for [D19T23] are often the highest, followed by [D20],[D20T21], and then [DTOTAL]. In this chart, except for China, the embodied emissions are in the same order of magnitude between all countries based on the factors [D19T23],[D20T21]and [D20]. Russia is the only country significantly affected by CBAM regarding the export of fertilisers. All in all, the analysis reveals that Russia, China and India have the largest CO2emissions intensity, but China is the largest polluter per million dollars of products in the chemical and non-metallic mineral products category. The analysis suggests that the CBAM will impose an uneven financial burden on exporters. The approach used to calculate embodied emissions of exported goods in the metals sector per country considers specific factors for basic metal products and fabricated metal products. The results show that China is the largest producer of emissions in the metals sector, followed by Russia, while other countries have similar levels of embodied emissions. J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931982 Table 4: Assumed rebated CBAM certificate prices for each trading partner (The World Bank (IBRD and IDA), 2022) Trading partner Name of the domestic Price of Domestic CPI Hypothetical rebated CPI CPI [€/tCO2e]CBAM certificate price [€/tCO2e] CHN China national ETS 10 90 United States California CaT 30 70 GBR: United Kingdom ETS 100 0 RUS and TUR Full CBAM certificate price: 100 JPN Japan Carbon Tax and Tokyo ETS 10 90 KOR Korea ETS 20 80 IND Full CBAM certificate price: 100 TWN, UAE, SAU, ISR and SRB Full CBAM certificate price: 100 ZAF South Africa carbon tax 10 90 UKR Ukraine carbon tax 1,0 99 Figure 15: Cumulative traded value of selected countries, stacked per group of CBAM goods, 2021 (Federal Statistical Office (DESTATIS), 2022b) 4.3. CO2emissions embodied in traded goods according to IEA The graph in Figure 19 presents a comparison of the intensity factors for each country in the production of iron and steel, as calculated through the method described in 3.3.3. Additionally, the intensity factors from the OECD TECO2database with the factors [DTOTAL]and [D24T25] are shown to validate the results from chapter 4.2. The analysis reveals a notable disparity between the two calculation methods. On one hand, the [OECD D24T25] method shows a contradictory trend compared to the intensities obtained using [IEA PECM]and [IEA PECMBP]. It implies that China has the highest emission intensity per ton of iron and steel, while the [IEA PECM]and [IEA PECMBP]results suggest it has the lowest intensity among all countries. At first glance, this seems implausible. However, it could be due to the vast volume of production in China, or there might be inconsistencies in the primary energy input data provided to the IEA. Such speculation will not be explored further in this study. For India only, the results from both methods roughly coincide, indicating that the emission intensity of iron and steel production in India falls between 3,5 and 4,5 tons of CO2per ton of iron and steel produced. As for the United States, it remains unclear which factor better represents the production reality. The case of Russia is surprising, as the [OECD D24T25]factor is below the estimated intensities according to [IEA PECM]and [IEA PECMBP]. It is also evident that the emission factor of electricity per country plays a role J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1983 Figure 16: Embodied CO2emissions in the imported goods of iron, steel and aluminum depending on the factor used, 2021 (Organisation for Economic Co-operation and Development, 2021) Figure 17: Comparison of the intensity factors of CO2emissions embodied in the metals sector, 2018 (Organisation for Economic Co-operation and Development, 2021) in the intensity factors of CO2emissions for iron and steel. This implies that if the electricity emission factor is twice as polluting as originally determined, the intensity of iron and steel will be roughly half a ton of emissions higher per ton produced across all countries. 4.4. Validation with GHG Protocol Tool and literature values The primary objective of this step is to identify the possible reasons for the deviation in the results. One hypothesis is that the fuel emission factors for each primary energy source, such as coal and natural gas, are incorrect. However, the results displayed in the graph in Figure 20 contradict this hypothesis. J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931984 Figure 18: Embodied CO2emissions in the imported goods of chemicals, polymers and fertilisers depending on the factor, 2021 (Organisation for Economic Co-operation and Development, 2021) Figure 19: Comparison of intensity of CO2emissions factors of steel depending on the data source and method of calculation, 2018 (BP, 2022; IEA, 2023; Organisation for Economic Co-operation and Development, 2021; U.S. Geological Survey, 2019b) Figure 20 suggests that the fuel emission factors assumed for each primary energy source are in a similar range of values, undermining therefore the possibility of low intensity CO2emission factors of iron and steel. The next phase involves comparing the outcomes of this study with the current literature on CO2emission production in the iron and steel sector. The aim is to investigate the hypothesis that the entire assumptions and approach adopted are flawed in principle, and that the CO2emission intensity factors in the iron and steel industry may differ significantly. The results are shown in the chart in Figure 21 and compared. The analysis shows that the intensities calculated are plausible and raises the question of how the factor [OECD D24T25]is higher than all other calculation methods. This will be further discussed in chapter 5.2. It is clear, however, that the intensities estimated for China according to [IEA PECM]and [IEA PECMBP]are too low and that a fair value for further research is the value [EU JRC]. Still, the analysis suggests that China has the lowest intensity factor of CO2 emissions of the major trading partners, followed by United J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1985 Figure 20: Comparison of intensity of CO2emissions factors of steel depending on the data source and method of calculation, 2018 (BP, 2019; GHG Protocol & Gillenwater, 2005; IEA, 2023; Organisation for Economic Co-operation and Development, 2021; U.S. Geological Survey, 2019b) Figure 21: Comparison of intensity of CO2emissions factors of steel depending on the data source and method of calculation, 2018 (BP, 2019; GHG Protocol & Gillenwater, 2005; IEA, 2023; Koolen & Vidovic, 2022; Organisation for Economic Co-operation and Development, 2021; U.S. Geological Survey, 2019b) States, Russia and India. The analysis further suggests that it is highly likely that the intensity factor of India lies somewhere between 3,5 and 4,5. Additionally, it can be assumed roughly that the intensity factors of Russia and United States lie somewhere between 2,0 and 3,5 tons CO2per ton of iron and steel, narrowing at least a range of intensities for further research. One could draw the inference that the factor [OECD D24T25]represents additional emissions, commonly known as scope 3 emissions. This could potentially explain the marked variation in the case of China and the United States. However, it is unexpected that the Russian value for [OECD D24T25]is considerably lower than other estimates, including the estimation from [EU JRC]. The same analysis, analogous to the iron and steel industry, is carried out for the aluminum industry (U.S. Geological Survey, 2019a), presenting the results in Figure 22. The presented chart reveals that the intensity of CO2 emissions in the aluminum industry is considerably higher when compared to the iron and steel industry. Additionally, the variances in intensities between countries are more pronounced in the aluminum industry, where the results from [D24T25]exhibit both lower and higher intensities than those reported in [IEA PECM]and [IEA PECMBP]. Except for the United States, the deviations of intensities among countries fall within the range of 5 to 7 tons of CO2per ton of aluminum produced. Notably, the values from [IEA PECM] J. D. Martinez /Junior Management Science 9(4) (2024) 1964-19931986 Figure 22: Comparison of intensity of CO2emissions factors of aluminum depending on the data source and method of calculation, 2018 (BP, 2019; GHG Protocol & Gillenwater, 2005; IEA, 2023; Organisation for Economic Co-operation and Development, 2021; U.S. Geological Survey, 2019a) and [IEA PECMBP]for the United States are significantly higher than those from [OECD D24T25]. It is noteworthy that the substantial difference between [IEA PECM]and [IEA PECMBP]indicates that distinct emission factors for electricity have a significant impact. Therefore, the United States is presumed to have the highest electricity consumption per ton of aluminum produced, followed by China and Russia. In contrast, India relies less on electricity to produce iron and steel, according to [IEA PECM]and [IEA PECMBP]. Nevertheless, the values reported for India seem implausibly low and are likely miscalculated. According to this analysis, the data on embodied emissions suggests that the exporting countries most affected by CBAM, when importing to Germany, will be China and Russia, followed by India. This statement, however, is to be proven in the next chapter as the additional production costs posed by CBAM may have a diminished effect due to the costs advantages that such countries have compared to western countries. Figure 23 reinforces the suggestion that the impact of CBAM is greatly dependent on the approach used for calculating the embodied emissions, as demonstrated in the iron, steel, and aluminum sectors. Except for India, the intensity factors per country exhibit substantial variation in all cases. The effect is particularly evident in China and Russia, perhaps owing it to the significant quantity of iron and steel traded with Germany. The following chapter scrutinizes the analysis, emphasizing the potential implications of CBAM on the production cost structure of each country. 5. Discussion 5.1. Effect of the CBAM on production costs and demand patterns This chapter analyzes the potential impact of the proposed CBAM on Germany’s de-mand for energy-intensive goods, as well as the impact on its major trading partners, including China, Russia, and India. The breakdown of the production costs per country3is presented in Figure 24. The average production costs of the EU are also considered in this chart, for the sake of comparison. The average total production costs in EU27 are the second highest after the United States. Germany’s major trading partners in the iron and steel industry, Russia; India and China have all lower production costs. According to the data presented, Russia has the lowest production costs with a cost advantage of approximately 100 euro per ton of steel produced, compared to the EU27. This is primarily due to its position as the country with the secondlowest material costs and the lowest energy costs out of all countries analyzed. In addition, Russia benefits from low labor costs and other costs, positioning it competitively in the market. However, the data suggests that Russia, like the United States, does not prioritize savings from production by using recycled scrap or self-power-generation in its production plants. Following Russia, India ranks second with slightly higher energy and other costs, but significantly lower material costs. Meanwhile, China has the highest material costs among all exporters examined, approximately 100 euro per ton higher than India. However, China compensates for this disadvantage through the lowest labor and other costs. Furthermore, China’s savings from using recycled scrap and self-powergeneration almost fully counterbalance its cost disadvantage in the raw materials procurement, according to the data provided. The data reveals that in the comparison of iron and steel producers, the EU27 and the United States are the least com3In this chapter, the trading partners of Germany in the iron and steel industry are presented from left to right following the least costs of production, and not the hierarchy presented in the chapters before. J. D. Martinez /Junior Management Science 9(4) (2024) 1964-1993 1987 Figure 23: Comparison of embodied emissions in the iron, steel and aluminum industry imported to Germany in 2021 per country depending on the data source and the correspondent intensity factor of CO2emissions (BP, 2019,2022; Federal Statistical Office (DESTATIS), 2022b; GHG Protocol & Gillenwater, 2005; IEA, 2023; Koolen & Vidovic, 2022; Organisation for Economic Co-operation and Development, 2021) petitive. Although they have slightly lower material costs than China, their labor costs are the highest among all facilities examined. Moreover, European facilities have the highest energy costs while the United States exhibits lower energy costs than China and India. However, the EU27 has a significant advantage over other countries in terms of a high share of savings from recycled scrap and self-powergeneration, which is crucial for maintaining competitiveness in the market. To provide a visual representation of the potential impact of CBAM on production costs, this study forecasts the shift in total production costs of iron and steel according to the methods set in 3.3.5. The graphs in Figure 25 and Figure 26 present the results of the analysis. Figure 25 and Figure 26 present an analysis of the impact of intensity factors of CO2emissions on the overall effect of CBAM during the 2026-2035 phase-in period. Based on the data presented in Figure 25, it can be deducted that CBAM may not significantly affect the structure of production costs. Moreover, there may not be a substantial shift in production and demand patterns in the short or long term, and China is likely to maintain its cost advantages. Russia will