The EU’s Carbon Border Adjustment Mechanism (CBAM) has the potential to spur awareness around global decarbonization efforts significantly. By putting a price on the carbon emissions embedded in certain imports, CBAM aims to create a level playing field for EU producers already paying for their emissions under the EU Emissions Trading System (EU ETS) and encourage cleaner industrial production in non-EU countries. The CBAM will apply to imports of goods in sectors such as cement, aluminum, fertilizers, hydrogen, and steel. From 2026, EU importers of these goods will have to buy CBAM certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules. This mechanism creates a strong economic incentive for non-EU producers to reduce their emissions to remain competitive in the lucrative EU market. The prospect of CBAM is already driving some strategic responses from companies and governments around the world:

•  Steel producers are being incentivized to invest in decarbonization technologies to capture a share of the EU market. For example, ArcelorMittal, the world’s largest steelmaker, has plans to invest in green steel production in Europe by 2030 to prepare for CBAM.
• Hydrogen producers are shifting investments towards low-carbon blue and green hydrogen to meet anticipated demand from the EU. Air Liquide, a major industrial gases company, is building a large-scale electrolyzer in the Netherlands to produce green hydrogen for export to the EU.
• Oil producers with lower-emission crudes are positioning to maximize sales to the EU, while higher-emission products are being redirected to other markets. Saudi Aramco, the world’s largest oil exporter, is investing heavily in carbon capture and storage to reduce emissions from its operations.
• Governments are considering introducing or strengthening their own carbon pricing mechanisms to collect revenues that would otherwise go to the EU under CBAM.

However, CBAM has also faced criticism from some countries and industries who view it as a protectionist trade measure. There are also concerns about its effectiveness in driving decarbonization if implementation is imprecise or if major economies like the US, China, and India do not adopt similar measures. Ultimately, the success of CBAM in spurring global decarbonization will depend on the widespread adoption and harmonization of standards. If other major economies follow the EU’s lead, the impact could be transformative. Even if they don’t introduce their own CBAMs, the introduction of CBAM in major customers of those countries might still impact how they manufacture their exports. CBAM could also drive investment in green technologies, renewable energy, and more sustainable practices throughout international supply chains. Coupled with growing consumer awareness of carbon footprints, CBAM could pave the way for a more sustainable and environmentally responsible global economy.

Some of the key challenges that non-EU countries may face under the CBAM framework are.

Economic Impact

One of the most immediate challenges posed by CBAM is its potential economic impact on non-EU countries, particularly those heavily reliant on exports of carbon-intensive products such as steel, aluminum, cement, and fertilizers. A study by the African Climate Foundation and the London School of Economics (ACF Submission on UK Government consultations on a possible introduction of UK CBAM (africanclimatefoundation.org) )estimates that the CBAM could lead to a reduction in exports from Africa to the EU by significant margins, with aluminum exports potentially decreasing by 13.9%, iron and steel by 8.2%, and cement by 3.1%. Such declines could have cascading effects on GDP, with projections suggesting an overall reduction of 0.5% across the continent, which, while seemingly small, is substantial compared to the benefits the EU expects from its trade agreements EU’s carbon tax could cost India 0.05 per cent of GDP: Report – The Economic Times (indiatimes.com). Countries like India, Brazil, and South Africa are particularly vulnerable due to their substantial trade volumes with the EU in these sectors. The imposition of tariffs based on carbon content could lead to a decline in sales, reduced profit margins, and ultimately lower corporate valuations for businesses in these regions. For many developing countries, the loss of revenue from exports could exacerbate existing economic vulnerabilities, hindering their ability to invest in sustainable development and climate resilience.

Compliance and Reporting Challenges

The operationalization of CBAM requires non-EU countries to develop robust reporting and compliance mechanisms to track and report the carbon emissions associated with their exports. This presents a significant challenge, particularly for countries with limited administrative capacity and resources. The transitional phase, which began in October 2023, allows exporters to choose from various reporting options, but by January 2026, all exporters will need to comply with stringent requirements. Many developing nations currently lack the institutional frameworks necessary for accurate emissions reporting. This gap could lead to difficulties in demonstrating compliance with CBAM regulations, potentially resulting in penalties or exclusion from the EU market. Countries may need to invest heavily in capacity-building initiatives to develop the necessary infrastructure for emissions tracking and reporting, which could divert resources from other critical areas of development.

Sustainext’s consulting team advises and helps companies navigate through these regulatory and reporting challenges.

Trade Relations and WTO Compliance

The introduction of CBAM has raised concerns regarding its compliance with World Trade Organization (WTO) rules. Critics argue that the mechanism could be viewed as a trade-restrictive policy that discriminates against exporters from developing countries. The absence of exemptions for least developed countries (LDCs) further complicates matters, as these nations are typically afforded special considerations in other trade agreements, such as the EU’s Everything but Arms initiative, which allows duty-free access for LDC exports. Developing countries have voiced their concerns at international forums, with some planning to challenge the CBAM at the WTO on the grounds that it constitutes a discriminatory trade barrier. The potential for disputes at the WTO could lead to protracted legal battles, further complicating trade relationships between the EU and non-EU countries.

Pressure to Implement Domestic Carbon Pricing

As a response to CBAM, non-EU countries may feel compelled to implement their own carbon pricing mechanisms to mitigate the impact of the EU’s regulations. For instance, India is considering an export tax on products affected by CBAM, which would effectively create a domestic carbon price equivalent to the EU’s (India mulling its own carbon tax on exports along the lines of CBAM | Economy & Policy News – Business Standard (business-standard.com)). While this could help maintain competitiveness, it also places additional burdens on countries that may not have the economic capacity to implement such measures. The pressure to adopt carbon pricing could exacerbate inequalities between developed and developing nations, as wealthier countries may have more resources to invest in green technologies and infrastructure. This disparity could lead to a “race to the bottom,” where developing countries are forced to lower environmental standards to remain competitive.

As the global landscape shifts in response to climate change, it will be crucial for non-EU countries to navigate these challenges carefully to protect their economic interests while also engaging in the broader fight against climate change. The success of CBAM in achieving its goals will depend not only on its implementation within the EU but also on how it is perceived and responded to by the international community.

While CBAM faces some challenges, it has the potential to be a powerful tool in the fight against climate change by incentivizing decarbonization, leveling the playing field for carbon-intensive industries, and generating revenues to support the green transition. The prospect of CBAM is already spurring awareness and action around the world, and its impact could be amplified if adopted more widely. Ultimately, CBAM represents a bold new experiment in global trade and climate policy that could reshape the global economy in the coming decades.