Research Associate
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a climate-related trade measure designed to address carbon leakage. At a basic level, it obliges importers of certain carbon-intensive goods to quantify and report embedded emissions—and, as the system matures, to purchase CBAM certificates linked to EU carbon prices. Yet CBAM’s most consequential feature lies elsewhere: it is not merely a policy tool for climate change, but a rulemaking mechanism that turns carbon emission accounting into an enforceable component of international trade. By defining how embedded emissions must be measured and translated into monetary obligations at the border, CBAM is redefining what qualifies as legitimate carbon data and credible trade compliance.
This rulemaking power makes CBAM potentially disruptive. For exporters and major economies, CBAM creates a strategic dilemma. Aligning with EU-defined carbon accounting rules may impose significant compliance costs and gradually lock countries into being rule-takers, ceding interpretive authority and long-term influence over how carbon standards are defined to the EU. Resisting CBAM, by contrast, may preserve autonomy in the short run, but it increases the likelihood of regulatory conflict, retaliatory measures, and escalating trade disputes. In the worst case, CBAM could end up weakening both climate cooperation and trade stability, undermining the very environmental rationale that justifies the mechanism in the first place.
The urgency is no longer theoretical. CBAM entered its definitive phase on 1 January 2026, meaning that reporting obligations are now institutionalized as routine compliance rather than a transitional experiment, with certificate-related liabilities set to follow from 2027 onward. At this stage, as CBAM moves from design to execution, ignoring CBAM as a “limited-impact” measure is a strategic misreading of where climate–trade governance is heading. Meanwhile, avoiding fragmentation and conflict will increasingly depend on whether different countries can coordinate toward an interoperable climate–trade rules rather than reacting unilaterally.
Traditional climate policies have largely operated within national or regional jurisdictions. In the absence of carbon border measures, climate policies primarily reshaped domestic cost structures without explicitly redefining the conditions under which international trade could take place. Even where carbon pricing mechanisms or emissions trading systems have generated cross-border competitiveness effects, those effects under traditional systems have been indirect—mediated through price signals rather than formal trade restrictions—and often worked to the disadvantage of jurisdictions with more stringent domestic climate policies.
In comparison, CBAM departures from earlier climate policy approaches by explicitly conditioning market access on compliance with carbon-related requirements. CBAM’s rulemaking power lies in how it integrates three elements—carbon accounting, carbon pricing, and market access—-which were often governed through separate policy instruments. Together, these elements enable CBAM to create a single compliance framework that turns carbon from an environmental metric into an enforceable condition of trade.
CBAM creates a universal and standardized carbon accounting mechanism. Foreign exporters are required to quantify embedded emissions using methodologies aligned with EU rules—covering system boundaries, default values, and verification requirements. In practice, this establishes the EU suggested methodology as the reference framework for what “counts” as carbon content in traded goods. Alternative accounting methods may still exist in other countries, but they do not carry equal trading weight in trades with the EU because they cannot be translated into and accepted within the CBAM regime.
Once emissions are accounted for, CBAM converts them into a monetary obligation anchored to EU carbon prices. CBAM defines not only how emissions should be measured, but also how they will be priced at the border. Importers must purchase and surrender CBAM certificates corresponding to the embedded emissions, with certificate prices calculated based on the average auction clearing prices of EU ETS allowances. While importers may claim a reduction reflecting an explicit carbon price already effectively paid in the country of origin, such credits operate at most as deductible reductions within an EU-defined system, not as recognition of an alternative pricing regime. In other words, carbon costs that cannot be evidenced and translated in a way that fits CBAM rules will not be credited in practice, and formal equivalence-based recognition of foreign carbon-pricing systems remains mostly nonexistent.
In this sense, CBAM represents one of the world’s first and most operationalized attempts to embed carbon accounting and pricing directly into market access at scale. Compliance is no longer a reporting exercise detached from commercial outcomes; it determines whether—and at what cost—goods can enter the EU market. This linkage transforms carbon data from informational signals into enforceable trade conditions, ensuring that measurement, valuation, and access reinforce one another.
Currently, CBAM’s sectoral coverage remains narrow as it only focuses on six emissions-intensive sectors, but the logic behind the mechanism is inherently scalable. It is highly likely to be treated as more than another extension of carbon pricing or a technical scheme of carbon credits when carbon—as a climate factor—becomes increasingly significant, countable, and enforceable in more sectors of the global trade. Once the EU establishes a workable template for measuring embedded emissions and decides to translate them into border obligations, it retains the regulatory capacity to extend the approach to additional products and downstream goods over time, making its long-term systemic impact difficult to predict at this early stage.
Equally important, CBAM is not merely aspirational and will become administratively executable quickly. Since its transitional phase in 2023, reporting requirements have already been institutionalized as routine compliance obligations, paving the way for the definitive phase in which these reporting duties turn into certificate-related liabilities. As CBAM enters its definitive phase from 2026, compliance will deepen beyond reporting alone, and financial obligations are also phased in gradually. By 2027 and beyond, practices that once seemed too complex to implement may increasingly become standardized expectations in global commerce.
As the rulemaker shaping these baselines, the EU is positioned to gain substantial first-mover advantages by strengthening its agenda-setting power, interpretive authority, and even the moral high ground in the emerging climate–trade order. Those who remain absent from early rule formation may later find themselves adapting to entrenched rules rather than shaping them.
CBAM is likely to generate a Brussels Effect, much like many other EU regulatory initiatives that have projected EU standards beyond the Union through market leverage rather than formal treaty-based harmonization. The “Brussels Effect” refers to the EU’s ability to externalize its regulatory rules across borders without directly applying coercive forces: firms and governments often spontaneously align themselves with EU standards because access to the EU market is commercially indispensable and maintaining multiple parallel compliance systems is impractical and costly.
The EU’s General Data Protection Regulation (GDPR), for instance, imposes strict obligations on how personal data are collected, processed, stored, and transferred, and even applies extraterritorially to firms handling EU residents’ data. Over time, GDPR has reshaped corporate compliance practices globally and influenced policy debates far beyond Europe, including through the EU’s “adequacy” logic that conditions cross-border data flows on comparable regulatory protections. Similarly, the EU’s chemicals regulation under Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) has affected global firms and supply chains by requiring extensive registration, evaluation, and documentation of chemicals for market access, effectively forcing upstream producers and exporters to meet EU compliance standards even when they operate primarily outside the EU.
In terms of CBAM, as mentioned previously, it has the potential to function as a rule exporter that contributes to new global carbon standards and compliance logics that are largely defined in favor of the EU. CBAM is indeed beginning with relatively small-scale regulatory coverage, but exporters are incentivized to align production practices, emissions measurement, and reporting systems with EU requirements. This is not necessarily because they politically endorse EU rules, but because they are unable to maintain multiple compliance systems. As a result, for the rest of the world, carbon standards in products covered by CBAM will shift toward EU legibility, carbon valuation will be anchored to EU pricing logic through CBAM certificates, and even the design of other carbon-related trade compliance could be linked to EU ETS benchmarks.
Nevertheless, the Brussels Effect is neither automatic nor cost-free. For example, the EU’s attempt to regulate aviation emissions through the EU ETS triggered significant pushback precisely because it directly touched powerful commercial interests and national regulatory sensitivities outside the EU. Facing sustained political pressure, the EU ultimately adopted the “stop the clock” decision to temporarily limit the scope of the measure. This case shows that EU regulatory projection can be contested and even constrained when external adjustment costs are perceived as too high. Yet the episode also demonstrated the potential reach of EU rulemaking: the fact that it provoked coordinated resistance from major economies reflects exactly how seriously EU standards are treated when they attempt to reshape compliance expectations in globally integrated sectors.
The EU created CBAM as a policy response to carbon leakage concerns arising from the EU Emissions Trading System (EU ETS). EU producers face higher compliance costs since the ETS puts a carbon price on covered sectors, while foreign producers in jurisdictions without comparable constraints may gain a cost advantage. This asymmetry raises the risk that production and its embodied emissions shift outside the EU without generating meaningful global emissions reductions, undermining both climate ambition and local industrial competitiveness. CBAM is designed to address this dilemma by aligning the carbon cost of certain imports with the carbon price faced by EU producers. It requires importers of selected carbon-intensive goods to quantify embedded emissions using EU-aligned methodologies and—over time—purchase corresponding CBAM certificates linked to EU ETS prices, thereby discouraging leakage and reducing distortions in market competition.
As the first carbon border mechanism operationalized at scale, CBAM initially covers six categories: cement, electricity, fertilisers, iron and steel, aluminium, and hydrogen. After a transitional reporting phase beginning on 1 October 2023, CBAM entered its definitive phase on 1 January 2026. While reporting has now become a formalized compliance obligation, the certificate purchase-and-surrender system will become operational from 2027, applying to embedded emissions from imports made in 2026.
Currently, a common view is that CBAM has limited impact as a trade policy. This perception is partly shaped by its narrow initial product coverage and the fact that it only fully entered its definitive phase on 1 January 2026. Many governments therefore treat CBAM as a minor and manageable compliance matter rather than a strategic challenge in trade governance. For example, in the United States, previous policy discussions have remained largely analytical—focused on whether CBAM affects specific U.S. sectors and how to interpret the EU’s evolving methodology—without clear evidence of a unified national approach that treats CBAM as a structural rulemaking turn in climate–trade governance. Notably, much of this limited attention occurred during the Biden-era; because under the second Trump administration, climate-related governance has received even less political attention, further reducing the likelihood of sustained institutional engagement with CBAM.
Even where objections exist, responses have often remained fragmented and largely rhetorical. In trade terms, concrete CBAM-specific countermeasures have so far been limited or absent. In climate-policy terms, there has been little sign of parallel system-building—such as developing interoperable carbon accounting frameworks—or of proactive engagement aimed at shaping CBAM’s evolving methodologies through cooperation with the EU. China, for instance, has publicly criticized CBAM as “unfair” and “discriminatory,” framing it as a protectionist measure and warning of countermeasures—yet opposition has primarily taken the form of official statements rather than a visible, CBAM-specific strategy to co-shape, or even reshape, the emerging rules. Similarly, India and Brazil have also criticized CBAM as a protectionist and unilateral measure, yet its response has remained largely rhetorical and procedural.
On the one hand, their perception is not groundless. CBAM starts with only a small group of carbon-intensive basic materials. Early data suggests that iron and steel accounted for 98% of declared CBAM-covered import volumes. For major exporters such as China, the immediate exposure through steel and iron trade is very limited: only around 4% of China’s steel exports were shipped to the EU, implying that the near-term aggregate effect of CBAM on China is minimal. This helps explain why the current political and commercial response remains mostly muted. In China’s case, the situation is also further weakened by a domestic reality of industrial overcapacity and the ongoing “anti-involution” narrative, where policy priorities focus more on curbing destructive internal competition than on actively intervening to counter a narrowly scoped external compliance regime.
Yet this “limited impact” interpretation becomes a strategic misjudgement once CBAM is understood as an expandable rule system rather than a static tax. This is precisely why CBAM could be disruptive to international trade in the future. Taking the electric vehicle export as an example, it represents a high-volume and high-strategic-value export category with a carbon-intensive production process as well as a heavy reliance on emission-intensive upstream materials and supply chain. Importantly, even though EVs are environmentally beneficial during the use phase—and should be evaluated positively in terms of total lifecycle emissions reduction—CBAM’s accounting logic focuses on embedded emissions in production. It does not credit downstream climate benefits in consumption, meaning that EV-related exports could still face material CBAM exposure if future coverage expands. Once CBAM logic moves further downstream—whether through formal scope expansion or through parallel rule diffusion—its cost implications would no longer be marginal. In that scenario, CBAM would not merely adjust a niche trade flow; it could reshape competitiveness in exactly the types of manufacturing sectors that major powers most actively compete in. In the case of China, CBAM’s effect will no longer be minimal.
Additionally, for major powers, the risk is not merely higher compliance costs, but the erosion of rule autonomy. Once CBAM-oriented carbon accounting and reporting mechanisms and supply-chain routines become widely internalized in a country, reversing course would be economically unrealistic. It would require a new round of economy-wide adjustments in carbon accounting and production practices, and firms are unlikely to repeatedly absorb large-scale transitions, making the subsequent establishment of new standards harder. For non-rulemakers, this means that inaction is not neutral. Instead, inaction today may translate into long-term dependence on an EU-defined framework that becomes increasingly difficult to contest or replace.
China, the United States, and many more countries have all invested years into developing domestic carbon governance tools—from carbon accounting methodologies to carbon-pricing systems. China’s national emissions trading system, for example, has already been institutionalized as a core instrument of domestic climate governance. Yet if CBAM becomes the default international interface for carbon legibility in trade, these domestic systems may lose much of their external relevance unless they can be recognized within EU-defined standards. Under such conditions, the policy value of domestic rulemaking diminishes: carbon governance ceases to be a purely national policy domain and becomes a question of whose rules structure market access. In this sense, treating CBAM as a policy with “limited impact” is less a factual assessment than a strategic misreading of where climate–trade governance is heading.
CBAM should first be recognized for its positive climate-policy intent. CBAM is designed to track the carbon footprint and to address carbon leakage by aligning trade with climate responsibility. In this sense, CBAM is an important attempt to encourage decarbonization through market incentives rather than allowing climate ambition to become a competitive disadvantage. It also signals an effort to make carbon more measurable, comparable, and accountable in cross-border trade, strengthening the credibility of climate governance in an era of uneven climate commitments.
However, since CBAM operationalizes climate standards through trade participation, it risks generating trade conflicts because of its nature as a tariff if rulemaking remains unilateral and uncoordinated. For foreign exporters, compliance costs on monitoring, reporting, and verification (MRV) could even go beyond actual carbon payment itself. Disparities in technological capabilities, infrastructure, and other resources across countries further intensify this burden, with developing economies disproportionately affected. UNFCCC technical reporting discussions have repeatedly highlighted that many developing countries still prepare emissions reports on an ad hoc basis, face difficulties sustaining expert teams, and lack permanent institutionalized MRV systems. These are precisely the kinds of infrastructures that CBAM-style compliance presumes.
Even when exporters succeed in building CBAM-compatible systems, they remain rule-takers rather than rule-shapers. The EU retains decisive authority to revise accounting methodologies and redefine or tighten verification requirements. More importantly, it is foreseeable that the scope of CBAM can be expanded to cover additional products and downstream goods, extending EU regulatory reach further into global value chains. As a result, non-EU firms and regulators may be pushed into continuous adjustment with limited ability to shape the standards in ways that reflect domestic transition realities or differentiated development pathways. This will concentrate interpretive and agenda-setting power over carbon-related trade largely within the EU. CBAM ties carbon conditions with market access; it is more likely to be framed by other countries as a trade barrier rather than a climate measure, especially when compliance burdens fall unevenly across exporters and disproportionately affect developing economies with limited MRV capacity.
Scholarly discussions have also noted that CBAM’s partially overlapping objectives and perceived trade implications could create tensions in climate-related trade rules. In practice, this structure leaves ample room for conflicting narratives. CBAM may be criticized as climate-justified protectionism—an environmental rationale used by the EU to impose trade barriers. On the other hand, affected exporters may resist CBAM on grounds of discriminatory burden-sharing to protect carbon-intensive domestic industries. Thus, the result of CBAM could be counterproductive: what begins as a legitimate mechanism to support decarbonization may gradually intensify trade frictions, weaken international climate cooperation, and incentivize the construction of competing and incompatible systems.
Preventing this outcome requires early coordination toward an interoperable framework since the long-term negative implications have already become foreseeable and therefore requires international engagement and management. Importantly, this effort cannot rest solely on affected trading partners such as China or India. As CBAM expands beyond basic materials toward downstream goods—such as car parts, household appliances, and machinery—the stakes and political sensitivity will only increase. The EU therefore also should proactively engage major economies in shaping comparability, verification, and recognition mechanisms, ensuring that CBAM supports climate ambition without hardening into a structural fault line in global trade governance.
In principle, a more unified and widely accepted rule framework would be beneficial for international trade. The multilateral trading system—epitomized by the WTO—was built precisely to reduce uncertainty, prevent discriminatory treatment, and create predictable conditions for cross-border commerce. Such a framework lowers transaction costs for firms and reduces the risk of trade barriers caused by unilateral rulemaking. In this sense, the appeal of “one coherent set of rules” represents the ideal basis for an “enhanced” or internationally accepted CBAM. If carbon-related trade rules could be governed under a unified architecture, it would help prevent decarbonization efforts from escalating into trade disputes and would protect the long-term stability of global supply chains.
However, climate governance is structurally less conducive to WTO-style harmonization. Climate standards inevitably interact with domestic development and capacity constraints. A single high benchmark may appear reasonable from the perspective of advanced European economies and industries, yet it can be perceived as inequitable by developing economies that face more limited technological readiness and fewer resources for rapid industrial upgrading. UNFCCC technical discussions have repeatedly recognized that institutional MRV capacity remains uneven across countries, with many developing economies still facing persistent challenges in sustaining expert teams and institutionalizing reporting systems. Under such conditions, imposing uniform carbon-accounting and compliance requirements without differentiation and transition support mechanisms risks turning climate ambition into a new form of structural disadvantage. This is why full convergence, while theoretically beneficial for trade, is politically, economically, and even climatically difficult in emission-reduction domains: carbon standards cannot be separated from questions of fairness, responsibility, and development pathways.
If full harmonization is unlikely, the more realistic objective should be achieving more comprehensive coordination and eventually cooperation. Countries should work together to build an interoperable climate–trade architecture that prevents conflict and fragmentation while preserving national policy autonomy. In practice, this means the EU, the United States, and China—the three actors with the greatest combined market size, regulatory capacity, trade leverage, and most importantly greenhouse gas emissions—longside with any other major actors, must treat CBAM not merely as an EU compliance regime, but as the opening stage of broader rulemaking on carbon accounting and pricing. Without their engagement, the system is likely to drift toward unilateral consolidation by the EU on one side and defensive countermeasures on the other, producing precisely the kind of trade dispute—or even tariff war—that would undermine both climate cooperation and trade stability.
To make CBAM workable as a climate instrument rather than a persistent source of trade friction, major economies need to negotiate credible interoperability mechanisms. Under the current CBAM framework, importers may claim deductions for an “effective carbon price” paid in the country of origin, but such deductions operate within an EU-defined methodology and do not constitute equivalence-based recognition of foreign regimes—suggesting that deeper institutional negotiation remains largely missing. Rather than forcing exporters into a single EU-defined logic, major economies could coordinate on comparable standards for carbon accounting and the recognition of creditable foreign carbon costs. Such coordination would allow countries to internalize carbon responsibility through domestic instruments—whether emissions trading systems or carbon taxes—while ensuring that exporters are not effectively paying twice under competing regimes. It would also mitigate perceptions that CBAM primarily functions as a unilateral revenue-collection channel, since carbon costs could be retained domestically and redirected into projects that best fit national decarbonization priorities.
At the same time, coordination is in the EU’s own interest. As the EU has already signaled that CBAM can expand to additional products and downstream goods over time, the political sensitivity and economic stakes of carbon-linked market access will only rise. This makes it increasingly important for the EU to actively engage major trading partners in shaping comparability and recognition mechanisms, ensuring that CBAM strengthens climate alignment without hardening into a one-way rule-export model.
Additionally, a cooperative architecture must incorporate developing economies in a way that acknowledges capacity gaps without institutionalizing permanent differentiation. Many developing economies face a dual disadvantage: limited MRV capacity to prove emissions performance, and higher embedded emissions due to carbon-intensive industrial and energy structures. Yet many of these economies remain heavily dependent on export-led growth, ultimately making them exposed to CBAM from both sides. This reality implies that developing economies require targeted flexibility, support, and transitional assistance rather than rigid compliance expectations. One promising approach is to connect climate-finance commitments to carbon-compliance capacity building. International climate finance mechanisms such as Green Climate Fund (GCF) and Climate Investment Funds (CIF) that reflect developed countries’ long-standing pledges to support developing countries could be designed to offset part of the compliance burden, for example by funding emissions monitoring infrastructure and even partially compensating carbon-cost obligations through targeted support. Such mechanisms would allow developing economies to meet carbon-related responsibilities while preserving development space, without requiring CBAM to rely on ad hoc exemptions that might erode its consistency. This approach also aligns with the spirit of “common but differentiated responsibilities,” by recognizing that a workable global climate–trade order cannot be sustained through compliance demands alone, but requires shared support and burden-sharing.
Ultimately, these measures are illustrative rather than exhaustive. The specific institutional design will require sustained negotiation and experimentation. Yet the strategic conclusion is clear: coordinated rulemaking is preferable to denial. If major economies can co-shape interoperable standards—rather than letting CBAM evolve into a unilateral template—the climate–trade nexus can become a platform for constructive cooperation.
CBAM marks a new stage in climate–trade governance. It is not merely a border policy with environmental objectives, but an operational rulemaking mechanism that links carbon accounting, carbon pricing, and market access into a single enforceable framework. As this framework matures after 2026 and gradually expands in scope, its long-term significance will far exceed its current sectoral coverage. The key implication is that carbon metrics are becoming institutionalized conditions of international trade, with the EU positioned to shape the baseline rules of comparability, verification, and cost recognition.
At the same time, CBAM’s rule-exporting potential also carries systemic risks. If major economies respond through denial, rhetorical resistance, or purely defensive countermeasures, CBAM may trigger a spiral of dispute escalation and regulatory fragmentation—ultimately weakening both climate cooperation and global trade efficiency. This outcome would not only undermine the EU’s climate objectives but also reduce the effectiveness of carbon governance worldwide.
The more viable path forward is coordination. Rather than rejecting CBAM as a unilateral initiative or treating it as a minor compliance issue, countries should engage in building interoperable standards and mutual recognition mechanisms for carbon accounting and creditable carbon costs, while linking climate finance to MRV capacity-building and transitional support for developing economies. Only through such dialogue-based cooperation can CBAM contribute to meaningful decarbonization without becoming a structural fault line in the evolving global climate–trade order.
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