Impact of carbon border adjustment mechanism on China's manufacturing sector: A dynamic recursive CGE model based on an evolutionary game

As the global carbon emission problem is getting more and more serious, the European Union has proposed the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage, which will have an impact on China's foreign trade. Based on this background and the problems of current research that ignores factors such as commodity prices, long-term impacts, intertemporal substitution analysis, and changes in national strategies for foreign exports, this paper propose a Computable General Equilibrium (CGE) model based on an evolutionary game as a dynamic recursive basis to study the impact of the CBAM on the Chinese manufacturing industry. For the industries mentioned in the CBAM, 18 affected sectors are collated, and a CGE model containing multiple blocks such as production, trade, and carbon emissions is built. Meanwhile, we establish an evolutionary game model with EU suppliers, manufacturers, and the government, allowing Chinese suppliers to compete with EU suppliers. Based on the above model, the impact of carbon tariff policies from 2020 to 2050 is studied. The results indicate that under the intra-EU competition condition, carbon tariffs will reduce the price of Chinese exports and slightly decrease China's real GDP, as well as the carbon emission intensity of 18 sectors and fossil energy. However, the impact of carbon tariffs on overall carbon emissions is small and is essentially a protective policy. In addition, the evolutionary game-based CGE model takes into account the dynamic strategies of both sides and is therefore less affected by carbon tariff shocks and recovers more quickly and more realistically. Finally, the article argues that the advantage of carbon tariffs for local suppliers is unsustainable and Chinese suppliers will still dominate, and local suppliers need more subsidies from the EU government. On the other hand, the Chinese government needs to implement a stricter carbon tax regime and export subsidies to improve the competitiveness of Chinese products in terms of green levels and price advantages. The purpose of this paper is to examine the quantitative impacts of CBAM on China's related manufacturing industries and strategies to maximize the benefits to both governments.