Modelling the Ukraine–EU Negotiation Process on the Carbon Border Adjustment Mechanism: Application of the Rubinstein Bargaining Model

Abstract

The Carbon Border Adjustment Mechanism (CBAM) is a core instrument of the European Union’s climate policy within the Fit for 55 package. From 1 January 2026, CBAM will be fully operational, obliging importers of carbon-intensive goods to purchase certificates reflecting embedded carbon emissions. For Ukraine, the mechanism poses severe economic challenges, as the EU accounts for over 80% of Ukrainian finished steel exports, while domestic metallurgy relies largely on blast-furnace technology, with average CO₂ emissions of 2.3 tonnes per tonne of steel. According to GMK Centre estimates, cumulative export losses may exceed USD 4.7 billion in 2026–2030, with a total GDP impact of up to USD 7.2 billion by 2030. Despite these risks, negotiations between Ukraine and the EU on exemptions or transitional arrangements remain weakly formalised and analytically underdeveloped.

The study aims to formalise Ukraine–EU CBAM negotiations using an alternating-offer bargaining framework (Rubinstein model), calibrate its parameters with empirical data, and derive optimal negotiation strategies for Ukraine.

The analysis applies the classical Rubinstein bargaining model with outside options, modelling negotiations as a two-player game over the distribution of trade-related economic surplus. Discount factors reflect patience and exposure to negotiation delays. Calibration relies on export dependency, GDP exposure to CBAM-covered sectors, diversification capacity, and geopolitical constraints. Comparative statics assess equilibrium sensitivity.

Estimated discount factors are asymmetric: δUA ≈ 0.85 and δEU ≈ 0.95. The baseline equilibrium allocates roughly 26% of surplus to Ukraine, indicating a structurally weak bargaining position. Three scenarios are identified: (1) full CBAM implementation with annual losses up to USD 1.6 billion by 2030; (2) a 3–5-year transitional regime conditional on establishing a national emissions trading system; (3) an integration scenario linking CBAM to EU accession. Strategic levers include export diversification, geopolitical signalling, and accelerated decarbonisation.

The Rubinstein model offers a rigorous framework for analysing CBAM negotiations. While current asymmetries disadvantage Ukraine, targeted policy actions can strengthen its bargaining position. Future research should extend the model to multilateral and dynamic settings.