The CBAM effect: Unveiling global sentiments on the Carbon Border Adjustment Mechanism
Besides transforming the European Union’s (EU) economy and society, the European Green Deal will and is already having major impacts on countries beyond the EU’s borders.
New policies aimed at mitigating climate change, such as the Carbon Border Adjustment Mechanism (CBAM) and the Corporate Sustainability Due Diligence Directive (CSDDD), have been celebrated by many as promising tools to tackle issues related to climate change. The CSDDD is aimed at companies, requiring them to establish due diligence procedures to address the impacts of their actions on the environment and human rights. Whereas CBAM will require importers of certain energy-intensive goods to pay a carbon price to encourage more environmentally-friendly practices in non-EU countries. These initiatives could be crucial in getting countries outside the EU’s borders to raise their ambitions and significantly contribute to the green transition.
Yet, countries outside the EU that will be affected by these instruments are not that enthusiastic. In a joint statement by the BASIC countries (Brazil, South Africa, India, and China) in April 2021, CBAM was called “discriminatory” and a violation of the principle of equity and Common But Differentiated Responsibilities.
The EU’s ability to unilaterally regulate global markets and set standards on climate action can undeniably take the EU far in incentivising other countries to raise their climate ambitions. However, the successful implementation of all-encompassing initiatives like CBAM will depend on how the EU engages with non-EU countries. This implies that their perceptions of the EU and its new policies need to be taken into account in the implementation phases of new instruments such as CBAM.
The controversial aspects of CBAM
CBAM is probably the most controversial and contested of the international European Green Deal initiatives and found to cause friction between the EU and its trading partners. The main issue that the EU is trying to address with CBAM is that businesses may move their production to countries with less stringent climate regulation, and thereby circumventing the EU’s more ambitious policies. To prevent this, the EU will introduce a carbon price on imported energy-intensive products that corresponds to the price of emissions allowances under the EU Emission Trading System (ETS). The instrument targets hard-to-abate industries and is partly based on the idea that it will incentivise foreign producers to establish carbon pricing of their own.
CBAM’s transitional phase entered into effect on the 1st of October 2023, requiring importers to report on embedded emissions of goods exported to the EU, but without incurring financial liabilities. Following the transitional phase, importers will be required to pay the carbon price that will reflect the level of emissions caused by the production process from 2026. Several non-EU countries have voiced concerns about the substantial cost that the carbon price will imply.
Although countries like China and Turkey will be the most affected in terms of the total value of EU imports, less developed countries like Mozambique and Zimbabwe, with high dependencies on targeted exports, will face substantial challenges. In addition, the lack of technical and financial resources in some Least Developed Countries (LDCs) hinders the advancement into less emission-intensive systems. This in turn leads to an increased carbon footprint for those states and ultimately disadvantages on the global market under CBAM. This has spurred a debate on the fairness and equity of the mechanism, and even to the broader concerns of climate justice relating to developing countries. Additionally, it has drawn harsh criticism from important trading partners such as China and India.
Critical reactions from the EU’s trading partners
When a detailed plan of the EU’s CBAM was partially leaked in June 2021 and later published in full in July, it sparked significant criticism from major economic powers, and the EU’s key trading partners such as China, India, and the United States. The Indian Government considered filing a complaint to the World Trade Organization (WTO), criticising CBAM for causing a trade barrier. Similarly, China’s former premier Li Keqiang called for justification of the carbon price at the WTO, and stated that the international community should be wary of the EU’s attempt to "create new green barriers to trade".
Chinese media discourse and feedback from the China Chamber of Commerce to the EU (CCCEU) also provided a clear picture of the dissatisfaction with the EU’s CBAM as well as other unilaterally enforced measures relating to trade and sustainability. The CCCEU has reported that Chinese businesses located in Europe see the introduction of due diligence on their value chains go beyond what should be expected of companies and businesses in terms of responsibilities. CBAM has been criticised extensively as well, being called a bargaining chip used to “attack other countries”. The underlying reason for this critique stems from the general dissatisfaction and perceived inappropriateness of the inclusion of “EU values” into trade policy, which is typically regarded as a value-neutral domain. The dissatisfaction expressed by countries like China with both CBAM and the CSDDD can be seen as a broader critique of how the EU is practising its extraterritorial climate governance, using trade policies as instruments to change other states' behaviour.
It has been argued by others that in a worst-case scenario, CBAM could heighten tensions in global trade and undermine multilateral cooperation in addressing climate change. Disapproval from states with substantial economic and political clout, like India and China, could also increase the risk of reducing acceptance of the initiative from less powerful states. The lack of support for CBAM from these vital trading partners and powerful global actors could therefore be detrimental to the success of CBAM.
The effect on vulnerable countries
While China, India, and the United States are major trading partners and among the top exporters of CBAM products to the EU, it does not necessarily mean that they will be the most impacted by the mechanism. The extent of vulnerability to the effects of CBAM mostly depends on countries' economic reliance on exports to the EU. The size of China’s economy, for instance, and its relatively low share of exports to the EU make it much less vulnerable compared to countries that are highly reliant on exports to the EU. This is especially the case if exports mostly consist of energy-intensive products, such as cement, steel, and aluminium all of which will be covered by CBAM. For example, Mozambique is one of several least developed countries that relies heavily on exports of aluminium to the EU, increasing Mozambique’s vulnerability in relative terms.
Moving beyond the perception aspect of the EU’s contested CBAM initiative, consideration of the justice aspect in relation to the principle of Common but Differentiated Responsibilities and Respective Capabilities (CDBR-RC) should also be stressed. This principle, formalised by the United Nations Framework Convention on Climate Change (UNFCCC), was set out to ensure that that responsibilities in addressing climate change is proportional in terms of individual countries’ economic capability and development, as well as to historic responsibilities. To acknowledge this is crucial not only to avoid deepening the North-South divide but also to ensure a cooperative spirit of climate negotiations beyond the EU’s borders.
Figure showing the value (in % of the country’s GDP) of the goods targeted by CBAM, from the most affected countries in relative terms. Data retrieved from: Park, Yamamoto & Doong (2024).
Looking ahead
Despite the fierce resistance toward CBAM by non-EU countries, it is already clear that it has had positive impacts on driving change and incentivising third countries to raise their ambitions. Some countries have already implemented similar carbon pricing mechanisms, raising ambitions closer to EU standards. However, when looking ahead, the EU will need to pay closer attention to third countries' concerns surrounding the effects of CBAM in order to ensure that a cooperating spirit on tackling climate change prevails. Following the transitional phases of CBAM, the EU should foster continued dialogue with third countries, and strive to meet the concerns of developing countries and consequently build trust to shift the perceptions of CBAM as fair.
About the author
Oda Grude FlekkøyOda is a PhD researcher at the European University Institute in Florence. She has previously worked as a research assistant at the Centre for Environment, Economy and Energy at the Brussels School of Governance where she worked on issues related to the European Green Deal, and public participation in EU climate governance.