The European Union Emissions Trading System (EU ETS) and the Carbon Border Adjustment Mechanism (CBAM) are important mechanisms to the EU’s climate strategy. They aim to reduce greenhouse gas emissions and prevent carbon leakage, where production shifts to regions with looser emission constraints. Established in 2005, the EU ETS operates on a cap-and-trade principle. It raises production costs for EU industries compared to international markets, leading to losses in market shares. To address this, the CBAM places a tax on imports based on their carbon content. This aligns foreign producers with EU carbon pricing and targets emission-intensive goods primarily in the manufacturing sector. This approach discourages the relocation of carbon-intensive production. It also incentivizes non-EU countries to adopt similar measures. By integrating CBAM with the EU ETS, the EU aims to maintain industrial competitiveness and promote global decarbonization efforts.

This thesis quantitatively assesses the impact of the CBAM on the price competitiveness of emission-intensive and trade-exposed industries in Germany. Germany is the EU's largest economy and a key player in manufacturing and exports. By developing a Leontief input-output price model and using data from Eurostat's FIGARO database, the study examines the effects of CBAM on production costs, export competitiveness, and domestic market competitiveness. The main research question is: "To what extent does the CBAM change the price competitiveness of carbon-intensive industries in Germany?" This price-centric analysis provides industry stakeholders with insights into the immediate cost impacts of CBAM on their sectors.

The analysis reveals that Germany’s manufacturing sector sees a minimal average production cost increase of 0.8% with the CBAM. Sub-sectors like basic metals, non-metallic mineral products, and refined petroleum face cost increases up to 3%. The CBAM effectively mitigates domestic market competitiveness deterioration by raising import prices from non-EU countries more than domestic production costs. However, it negatively impacts export competitiveness, necessitating additional measures such as subsidies, tax credits, export rebates, and “contracts for difference.” The CBAM also presents opportunities for revenue recycling into green infrastructure and technologies. The study underscores the need for supportive export-oriented policies to maintain Germany’s industrial competitiveness under stringent climate regulations. Despite some export market losses, gains in domestic markets are more pronounced. This understanding of the CBAM's economic implications is important for the EU’s climate strategy and economic integration. The results of this thesis have several limitations due to modelling simplifications. These include assumptions of no behavioral changes by companies, fixed production inputs, and linear technology, which may not reflect real-world adaptability and substitution capabilities. Additionally, the model assumes non-EU countries face the full CBAM tax without considering their emissions trading systems or free allowances within the EU, potentially overestimating cost impacts.

This thesis contributes to the existing literature by offering a targeted, sector-specific analysis of the CBAM's impact on Germany's manufacturing economy. Prior studies have largely overlooked this, focusing instead on aggregated country-level impacts or external trade partners. Emphasizing price impacts and using a detailed input-output model, the research provides actionable insights for policymakers to refine the CBAM and support vulnerable sectors. It adds to the policy debate on balancing environmental goals and industrial decarbonization by identifying the most affected manufacturing sub-sectors. The comparative analysis between Germany and the EU highlights the differential impacts of the CBAM and shows Germany's specific vulnerabilities and strengths, such as the mitigating effect of high value-added in the chemical industry. The study also demonstrates the integrated effects of the CBAM and the EU ETS, providing insights into their interplay. Using the novel FIGARO database, the research sets a precedent for future studies to use similar data sources. Finally, it offers policy design considerations to mitigate negative CBAM impacts, providing a scientific foundation for policy adjustments.

Future work should focus on sector-specific studies in carbon-intensive industries like steel, cement, aluminum, and chemicals. These studies should explore the sectoral impacts of CBAM and consider revenue recycling models. Research should also integrate varying substitution rates and price elasticities in input-output models, using detailed data collection on compliance costs to improve accuracy. Combining input-output with agent-based modeling can provide further insights. Improved data-sharing practices between the EU and trade partners are essential. Standardized protocols ensuring consistency and reliability, potentially via international data spaces, will lead to more precise insights.