The Carbon Border Adjustment Mechanism (CBAM) is a policy initiative by the EU aimed at reducing carbon leakage by imposing a carbon price on imported goods from countries with less stringent climate policies. As global efforts towards achieving net-zero emissions intensify, CBAM seeks to ensure a level playing field for EU industries while encouraging greener production practices worldwide. However, this policy has significant implications for international trade, particularly concerning World Trade Organization (WTO) regulations and trade equality, as well as how the collected CBAM revenue will be further utilised in emission reduction strategies for other exporting countries.
This policy brief examines the impact of CBAM on WTO policies, highlighting concerns related to trade discrimination and potential violations of global trade norms. According to the World Bank, CBAM could affect exports worth $16 billion annually from developing countries. The UN Conference on Trade and Development estimates that countries such as India, Brazil, South Africa, and Indonesia could face export losses of up to $5.6 billion per year due to increased tariffs on carbon-intensive goods. While CBAM aligns with environmental objectives, it raises questions about protectionism and its compliance with WTO principles of non-discriminatory trade.
Developing countries, which rely heavily on carbon-intensive exports, are particularly affected by CBAM. The financial burden of compliance, lack of technological advancements, and the risk of reduced market competitiveness pose significant challenges for these economies. For instance, India’s iron and steel sector – a major export industry – could face additional tariffs, increasing costs by up to 20%, according to a study by the Global Trade Analysis Project. Similarly, African countries dependent on raw material exports may struggle to align with CBAM regulations, potentially reducing gross domestic product growth by 0.5% to 1% in affected regions.
Furthermore, the study explores the ongoing debate between CBAM and the G20 economies, many of which oppose the mechanism due to its disproportionate impact on emerging markets. Countries such as China, Russia, and Brazil argue that CBAM undermines the principle of common but differentiated responsibilities in climate action, creating economic disparities rather than fostering a unified approach to sustainability. According to a report by the International Energy Agency, CBAM could drive $25 billion annually in additional revenue for the EU, but at the expense of developing countries struggling with carbon transition policies.
The geopolitical implications of CBAM, potential trade conflicts, and alternative frameworks for ensuring equitable carbon pricing are also discussed. This research provides a comprehensive analysis of CBAM’s role in shaping global trade policies, its economic consequences for developing countries, and the broader discourse between regulatory frameworks like the WTO and multilateral platforms like the G20. Understanding these dynamics is crucial for balancing climate goals with fair trade practices and ensuring an inclusive transition to a low-carbon economy.
