with Gunhild Berg, Seyit Mümin Cilasun & Etkin Özen, World Bank Policy Research Working Papers.
This paper studies how firms respond to the announcement of the European Union’s Carbon Border Adjustment Mechanism (CBAM), focusing on Turkish manufacturing firms with substantial exposure to the EU market. Exploiting variation in firms’ pre-announcement exposure to CBAM-covered exports, the paper estimates difference-in-differences models using detailed firm–product–destination trade data. The findings show that more exposed firms exhibit relatively lower post-announcement exports of CBAM-covered products to the European Union (EU) and relatively higher exports to non-EU destinations, consistent with a market-switching response. These differences are economically meaningful: a one–standard deviation increase in exposure is associated with a 3.2 percent lower post-announcement level of CBAM exports to the EU and a 5.5 percent higher level of exports to non-EU markets. In contrast, the analysis finds no corresponding changes in export prices, suggesting that firms adjust quantities and destinations rather than pricing. The paper further shows that higher exposure is associated with a lower likelihood and lower levels of sourcing green investment inputs, relative to less exposed firms in the post-announcement period, both from foreign and domestic suppliers. This suggests that there is limited short-run adjustment along the green investment margin. Heterogeneity analyses show that export reallocation responses are stronger among larger and financially unconstrained firms, whereas adjustments along the green investment margin remain limited across firm types. Overall, the results suggest that, in the short run, firms respond primarily to the anticipated costs of CBAM by switching markets rather than upgrading production.