Comparing carbon border adjustment mechanism certificates to EU allowances: price predictability and arbitrage opportunities

Efforts like the EU Emissions Trading System (EU ETS), have long faced criticism for encouraging overseas production and carbon leakage. In response, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), which took effect from January 2026. Under EU Regulation No. 956/2023, CBAM requires firms to purchase certificates for unpaid emissions when importing carbon-intensive products. The pricing mechanism offers a one-week price predictability window which simplifies compliance for importers while ensuring administrative convenience. This paper identifies the existence of a predictability benefit, where we demonstrate that solely by the one-week window, CBAM compliers are capable of navigating local price minima and strategically allocate certificate purchases. We also estimate the magnitude of the predictability benefit using geometric Brownian motion to simulate EUA prices and performing 20,000 iterations for each Monte Carlo simulation. The analysis assumes an efficient EUA market, among other practical simplifications. Our findings reveal an average 4.36% predictability benefit under typical market conditions, which intensifies as EUA prices decline. This highlights potential shortfalls in the CBAM framework, prone to times of downward price trends. Further research is needed to explore the tail risks and long-term impacts of this price disparity. CBAM certificates could be acquired, on average, 4.36% cheaper than EUAs due to one-week predictability benefit for foreign firms. The predictability benefit decreases as EUA prices rise, with stronger upward trends leading to a smaller predictability benefit. Regulatory intervention is necessary when EUA prices trend downwards, as a daily decline of 0.5% in EUA price trends leads to a mean predictability benefit of 9.88% within a quarter. Policy aiming to keep the expected predictability benefit below 1% would require a near doubling of EUA prices every quarter, which would be economically untenable.