The European Union has made significant progress in reducing CO2 emissions in recent decades, partly due to the implementation of the EU Emissions Trading System (EU ETS). However, the decline in emissions has not been matched by an equally substantial reduction in the continent’s carbon footprint. To remedy this problem, the EU has proposed a Carbon Border Adjustment Mechanism (CBAM), through which a carbon quasi-tariff, determined based on the embodied emissions of the good and priced according to EU ETS criteria, would be imposed on imports of non-EU products from specific sectors. SPES Researchers from the EUI and OsloMet in their Working Paper “Understanding and assessing CBAM: vulnerability and impacts in the EU” analyse the functioning of CBAM, its pros and cons, and the current state in light of the proposed revisions, with particular attention to the potential impact of this mechanism on the economies of European countries.
The European Union’s CBAM aims to prevent carbon leakage by adjusting the costs of certain imports according to their carbon intensity. In practice, CBAM levies a carbon tax on imports from six sectors (iron and steel, aluminium, cement, fertilisers, electricity and hydrogen) based on their embedded carbon emissions. It aims to avoid the risk of carbon leakage by ensuring that specific imported goods meet emissions standards similar to those produced within the EU. The measure is scheduled to enter into force in 2026.
Carbon leakage
Stringent unilateral climate policies such as regulated carbon markets may result in carbon leakage, a situation whereby reductions in emissions within a jurisdiction are counterbalanced by increases outside of it. Consequently, the leakage rate is the ratio between the increase of emissions by non-regulating countries and the decrease of emissions by regulating countries.
More stringent internal climate policies could tempt rich countries to outsource to avoid paying the same level of carbon prices. Theoretically, a stricter Emissions Trading Scheme may lead to greater reductions in emissions but could also result in increased delocalisation of polluting production activities.
Imposing border carbon adjustments is a much-discussed regulatory tool to minimise leakage and safeguard heavy industry competitiveness. The EU is trying to level the playing field with its Carbon Border Adjustment Mechanism.
CBAM pros and cons
1.Complying with WTO regulations
Measuring the exact WTO compatibility of the CBAM is quite complex. According to the WTO rules, a member is prohibited from discriminating between “like” products from various trading partners, awarding them “most favoured nation” (MFN), and between its products and “like” foreign products, awarding them “national treatment”. On the MFN aspect, the EU has provided for the application of the CBAM to all trading partners. On the “national treatment” feature, it should be remembered that the CBAM is a mechanism that extends domestic regulation and does not contain stricter rules for the industrial sectors it covers.
2.Limiting carbon leakages
To what extent border mechanisms prevent carbon leakage is a crucial question. The literature provides mixed results. Some studies demonstrate the effectiveness of CBAM in lowering carbon leakage, while others highlight its limitations. Despite its strengths, CBAM alone cannot fully address leakage caused by the EU ETS. This suggests that CBAM, while effective, may require further policy support. Maximising its effectiveness in reducing carbon leakage will require ongoing refinements, expanding sectoral coverage, and strengthening international cooperation.
3.Supporting EU competitiveness
Without CBAM, the EU industry will face significant competitive disadvantages compared to its competitors due to the unequal implementation of carbon pricing. One way of preserving the EU’s competitive position in the global market while contributing to the green transition is to focus on innovation support. Innovation funding can enhance the competitiveness of EU production by reducing the costs of abatement and speeding up the adoption of clean technologies, thus making decarbonised products more price-competitive in the international market. This support could take the form of investment subsidies, tax credits, or other instruments.
4.Incentives to other jurisdictions to increase climate ambition
Through the imposition of a carbon cost on imports that replicates the EU ETS, CBAM offers a compelling economic argument to countries exporting to the EU to either put in place or enhance their domestic carbon pricing policies. This leads to conformity of carbon pricing policies worldwide and enhances climate actions in various countries.
5.Violating the CBDR-RC principle
The CBAM compatibility with the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) has been discussed. The CBDR-RC principle is central to international environmental law and recognises that countries have different responsibilities and capabilities in addressing climate change. CBAM poses questions regarding equity and power, but it is possible to improve its compatibility with principles of international climate governance through, for example, the introduction of differentiation and targeted support.
6.Impact on the EU internal market
The mechanism has implications for the EU internal market, affecting both CBAM-covered and non-covered sectors. The removal of free allowances and the CBAM implementation lead to increased costs for certain sectors, with the non-metal minerals sector experiencing value-added losses of up to 2.8% due to its limited coverage under the mechanism. CBAM also influences downstream industries, such as electrical equipment, machinery, and motor vehicles, which rely on CBAM-covered materials.
Trade tensions may also arise, particularly with developing countries that view CBAM as a protectionist measure. These economic and trade implications show the effects of CBAM extension beyond the initially covered sectors, creating a competitive environment within the EU and affecting trade relations with the rest of the world.
CBAM Policy implications
The main concern is with the European Commission’s proposal to use 75% of the revenues from the sale of CBAM certificates for the EU budget (Mair, 2025). The European Commission has calculated that annual CBAM revenues will be about €1.5 billion from 2028 onwards. Nevertheless, the use of these funds is not clear.
One possible strategy is to direct CBAM revenues into European climate policies and strategies and make them available for green expenditures. This would guarantee that the funds will be used for environmental purposes while simultaneously satisfying the requirements of the international trade rules. The mechanism can also further support the EU’s wider climate objectives by dedicating these revenues to renewable energy, carbon reduction, and climate resilience projects within the EU while avoiding protectionist concerns.
An alternative policy suggestion, which is backed by environmental organisations, trade experts, and some representatives of the EU to meet the CBDR-RC principle, suggests that CBAM revenues should be used to finance climate change adaptation and mitigation in developing countries. These nations are likely to suffer from the economic consequences of CBAM because several of them depend heavily on carbon-intensive exports to the EU.
The Working Paper 7.2″Understanding and assessing CBAM: vulnerability and impacts in the EU” is part of Task 7.2 “” A new Carbon Border Adjustment Mechanism
in Europe”/ Work Package 7. The report has been written by Jacopo Cammeo – Researcher of the SPES Project, European University Institute, Florence School of Regulation; Albert Ferrari – Researcher of the SPES Project, European University Institute, Florence School of Regulation ; Simone Borghesi – Team leader of the SPES Project, European University Institute, Florence School of Regulation and University of Siena; Therese Dokken – Researcher of the SPES Project, Oslo Metropolitan University.
