Report

Learning from CBAM’s transitional phase

This report from UK think tank the Centre for European Reform argues that the EU should lead industrial decarbonisation by pairing CBAM with actions to support clean industrial investments in least developed and developing countries.

With its new Carbon Border Adjustment Mechanism (CBAM), the EU will impose the same carbon price on both domestic and foreign producers of certain industrial goods. But because CBAM will impose a new barrier to trade, it has irked many of the EU’s trade partners. Several countries, particularly developing nations with carbon-intensive industries, have called CBAM discriminatory: China and India have already signalled legal challenges at the World Trade Organisation.

A new CER policy brief by Elisabetta Cornago and Aslak Berg, ‘Learning from CBAM’s transitional phase: Early impacts on trade and climate efforts’, argues that the EU should lead the industrial decarbonisation revolution by pairing CBAM with concrete actions to support clean industrial investments in least developed and developing countries. The authors find that, so far, CBAM has not noticeably changed trade flows of affected goods – iron, steel, cement, aluminium, fertiliser, electricity and hydrogen. That is perhaps not surprising, since fees for carbon content will only be imposed in 2026 (although importers must already deal with bureaucratic costs like estimating carbon content and reporting on it).

But CBAM has had some positive ‘policy spillovers’, having encouraged several governments to consider adopting carbon pricing policies that would diminish the burden of CBAM on their economy. CBAM is expected to gradually reshape global industrial production of the affected goods, incentivising foreign producers to shift towards lower-carbon production processes.

But its economic impact is going to be asymmetric: the countries most affected by CBAM will be those that export a lot of carbon intensive goods to the EU and do not apply a domestic carbon price.