Evaluating export vulnerability through import demand elasticity in carbon border adjustment contexts: a focus on Türkiye

Abstract

Import demand elasticity (IDE) is a critical metric often employed to guide government decisions regarding tariffs and non-tariff barriers, ensuring that foreign trade remains uninterrupted while optimizing tax revenues. This study, however, leverages IDE to assess the impact of the carbon border adjustment mechanism (CBAM) on Türkiye's decarbonization process. Specifically, the research analyzed the total export quantities and unit prices of four product groups-cement, fertilizers, and inorganic chemicals, steel and iron, and aluminum-exported from Türkiye to the European Union-27 countries under the CBAM framework between 2002 and 2021. Using CCE and AMG methodologies, IDE parameters were estimated, followed by calculations of unit price increases and potential export losses across three distinct scenarios. The findings indicate IDE values of 1.95 for cement, 1.20 for fertilizers and inorganic chemicals, 1.85 for steel and iron, and 1.47 for aluminum. These high elasticity values suggest that Türkiye may face substantial export losses for these products. Later we calculated unit price increase and potential export loss according to three different scenarios. Across all three potential scenarios, while Türkiye's iron and steel exports to the EU-27 face a great risk of declining by approximately 25%, the aluminum sector was found to be the least affected across all three scenarios. Consequently, it is imperative for Türkiye to expedite its decarbonization efforts to safeguard its export market share within the EU.

Keywords: Carbon border adjustment mechanism; Carbon emission; Decarbonization; Import demand elasticity; International trade.