The EU Carbon Border Adjustment Mechanism, a trade policy created by the European Union to incentivize decarbonization, could be a case study to suggest what types of incentives can move international interests toward global alignment on climate policy.
Introduction by Milan Elkerbout
January 2026 saw the full launch of the European Union Carbon Border Adjustment Mechanism (EU CBAM). This policy will extend carbon prices, which are imposed through the EU Emissions Trading System, to certain imported goods. “Full launch” in this case means that importers of the covered goods will need to start buying “CBAM certificates” to cover the greenhouse gas emissions associated with the production of these goods (i.e., the carbon intensity of those goods). The EU CBAM already had a “soft launch” in late 2023, so the European Union could start collecting data and prepare the many implementation rules that will be required to operationalize this complex policy that combines climate and trade.
Political uncertainty may continue (some EU countries wanted to exempt the fertilizer industry, fearing an increase in agricultural prices), and questions around scope may remain. Applying CBAM rules to certain products may incentivize the trade of different products in the same value chain. The use of “default values” to determine a product’s carbon intensity will affect perceptions of fairness and the ways that other countries may respond to the EU CBAM.
A policy such as the EU CBAM can impact the environment in multiple ways: first (and primarily), by increasing the effectiveness of domestic climate policy such as the EU Emissions Trading System; second, by creating a carbon price signal for importers, who may respond with cleaner production to become more competitive in certain markets; and third, by incentivizing the adoption of new climate policies in other countries that target domestic emissions. With this article, Paola Rocchi examines the potential of the direct environmental impact of the EU CBAM itself. While emissions reductions that result from the EU CBAM are modest at –0.2 percent, Rocchi finds that global emissions will be lower with the CBAM than without it, while trade patterns show a shift toward more domestic production and imports from comparatively lower-carbon countries at the expense of more carbon-intensive countries such as China and India. These results echo a 2025 analysis from Resources for the Future that shows how proposed policies, such as the Foreign Pollution Fee Act and Clean Competition Act, would reshuffle international trade to favor cleaner production, even if the greatest environmental gains tend to be made by incentivizing cleaner domestic production. The article also examines how these effects change when major trading partners, such as China and India, adopt comparable carbon pricing, revealing how the CBAM reshapes trade and competitiveness under different policy configurations.
Article by Paola Rochi
Can the European Union’s carbon border adjustment mechanism (CBAM) trigger a global wave of climate policy alignment? As a key pillar of the European Green Deal, the CBAM marks the first large-scale attempt to extend carbon pricing to imported goods. By requiring importers to bear a carbon cost aligned with the carbon price that domestic producers face as determined by the EU Emissions Trading System (unless an equivalent carbon price has already been paid in the country of origin), the CBAM aims to level the playing field for EU industries and address the risk of carbon leakage. Carbon leakage refers to the relocation of production, and associated emissions, from jurisdictions with stringent climate policies to jurisdictions with weaker or no carbon constraints—which undermines the environmental effectiveness of unilateral climate action. By mitigating this risk of leakage, the CBAM seeks not only to preserve industrial competitiveness but also to prevent global emissions from increasing due to policy-induced shifts in trade and production.
Although its scope initially is limited to certain energy-intensive sectors—steel, aluminum, cement, fertilizers, hydrogen, and electricity—the CBAM already has ignited reactions and global debates. In this article, I’ll use forward-looking macroeconomic modeling to evaluate the effects of the CBAM on trade, emissions, and GDP. I’ll also explore how policy responses in China and India may influence the overall effectiveness of the EU CBAM.
Setting Up the Analysis
The analysis I’ll describe here builds on the modeling framework and scenario design developed in an article that I wrote with colleagues and published this year in the Journal of Cleaner Production. Our paper provides a detailed assessment of the macroeconomic and trade impacts of the EU CBAM using the Fully Interregional Dynamic Econometric Long-term Input-Output (FIDELIO) model. The model integrates emissions intensities by economic sector using data on economic trade from the established EU databases known as the Full International and Global Accounts for Research in input-Output analysis (FIGARO) and FIGARO-E3 (with “E3” denoting employment, energy, and emissions). Integrating these data should capture direct and indirect policy effects on trade, output, and emissions.
We evaluated the CBAM in the model as a sector-specific tax based on the actual value of the transaction (i.e., an ad valorem tariff), with rates varying across CBAM-covered sectors according to their embedded carbon dioxide intensity and the prevailing carbon price in the EU Emissions Trading System. The tariff phases in gradually alongside the phaseout of carbon allowances, which EU industries can acquire at no cost through the EU Emissions Trading System, a strategy that aims to limit carbon leakage during the transition to full carbon pricing.
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0.2 %
Projected decline of global carbon dioxide emissions by 2040 under the Carbon Border Adjustment Mechanism, relative to a baseline scenario without it—but the indirect effects may prove far more significant
We simulated various scenarios in our model: a baseline with the revised EU Emissions Trading System alone, a scenario of CBAM implemented in the European Union, and variants in which China and India adopt domestic carbon pricing in CBAM-covered sectors.
The aim was to assess how the impact of a CBAM might shift if major trading partners ramp up their climate policy ambition (particularly through more stringent carbon pricing). Investigating the model outputs could help us understand the roots of the strong political and diplomatic reactions that the CBAM policy has provoked globally.
Key Findings
Under current legislation, any direct environmental impact of the CBAM is limited.
Our modeling shows that by 2040, global carbon dioxide emissions decline by less than 0.2 percent with the CBAM relative to a baseline scenario that considers only the revised EU Emissions Trading System. Emissions within the European Union would rise slightly, particularly in Eastern Europe, as reshoring of energy-intensive production offsets part of the global reduction in emissions.
Economic impacts are modest at the macro level, according to the model. Changes in GDP would remain below 0.5 percent globally across all regions, confirming findings from an impact assessment published by the European Commission in 2021. However, the economic impacts of the CBAM are more pronounced in certain sectors. Highly energy-intensive sectors in the European Union, such as steel and cement, increase production output by 1.5 to 2.0 percent on average.
Trade within the European Union increases, suggesting a relative competitiveness gain for domestic firms. Excluding the flow of goods within Europe, EU imports of highly energy-intensive goods fall about 7 percent.
The CBAM also shifts trade patterns. Imports decline for highly energy-intensive goods from China, India, and Russia, while imports increase from cleaner producers like the United States.
Carbon Pricing in China and India
A central feature of the CBAM is that it provides partial exemptions for imports if a comparable carbon price has been “effectively paid” in the country of origin. To assess how such exemptions could influence the effectiveness of the CBAM, we simulated scenarios in which China and India adopt domestic carbon pricing mechanisms that align with the EU benchmark.
Our focus is not on the domestic effects of these pricing policies per se, but rather on how a hypothetical carbon price in China and India would alter the effect of the CBAM on trade, emissions, and competitiveness. When major exporters to the European Union implement their own carbon pricing, the impact of the CBAM changes meaningfully. For instance, the effects of reshoring energy-intensive production to the European Union are partially reversed, reducing the trade boost within the European Union that we observe under the EU-only CBAM scenario. Likewise, the emissions increase within the European Union—an unintended consequence of reshoring—also diminishes.
While its direct environmental impacts remain modest, the most powerful effects of the CBAM may emerge indirectly.
Trade patterns also shift with the addition of a carbon price in China and India. Imports of carbon-intensive goods from China and India no longer decline as steeply, because the carbon cost already gets incorporated in the export price. India, for example, regains part of its export share in CBAM-covered sectors, demonstrating that domestic carbon pricing can mitigate the trade-disruptive effects of CBAM tariffs.
The impact, however, is not symmetrical across scenarios. When India adopts domestic carbon pricing, China’s exports are largely unaffected. In contrast, when China enacts carbon pricing, the comparative advantage that India would otherwise gain in the EU market erodes, as CBAM tariffs shift in response to relative emissions performance. This asymmetrical effect reveals that the CBAM not only mitigates carbon leakage but also reshapes trade dynamics in the context of uncoordinated global climate policies, creating strategic incentives for broader international alignment. Our results show that the CBAM may reinforce rather than undermine climate cooperation, aligning trade incentives with climate ambition.
Implications and the Road Ahead
In macroeconomic terms, the effects of the CBAM on GDP are negligible globally, with any deviations staying below 0.5 percent. However, the impacts by sector are significant—especially for highly energy-intensive industries—and call for complementary measures to support vulnerable sectors and regions.
The CBAM shifts import patterns away from carbon-intensive producers like China and India toward cleaner exporters, aligning trade with climate ambition but raising concerns for developing and export-dependent economies. Additionally, concerns have been raised by international organizations and policy analysts about the burden that the CBAM places on least-developed countries, potential disputes with the World Trade Organization, and the practical challenges associated with emissions data collection and reporting. These issues call for technical assistance, transitional exemptions, and strategic diplomacy.
While its direct environmental impacts remain modest, the most powerful effects of the CBAM may emerge indirectly. First, the CBAM likely played a pivotal political role in enabling the European Union to phase out free carbon allowances in energy-intensive sectors—particularly for member states concerned about industrial competitiveness.
Credit: Markus Pfaff / Shutterstock
Second, the CBAM has provoked policy responses from key trading partners, highlighting its potential as a global climate policy signal. Recent multilateral climate negotiations have reaffirmed the importance of international coordination on climate policy, providing a broader strategic context in which instruments such as the CBAM operate. Already, countries like Brazil, Indonesia, and Turkey have accelerated carbon market developments—partly in response to the CBAM.
As these dynamics unfold, the CBAM may catalyze what Delbeke and Vis describe in their 2023 paper as a “stepping stone” toward a global carbon pricing architecture. As carbon pricing expands globally, the CBAM may generate policy spillovers by encouraging the adoption of similar border adjustment mechanisms in other jurisdictions. Our extended scenarios show that the effects of a CBAM on trade diminish when partner countries adopt their own carbon pricing. In that context, a CBAM can act as a catalyst for convergence in global climate policy, even creating indirect incentives for action among trading partners—especially when asymmetries emerge. For instance, India’s relative advantage erodes if China institutes a carbon price first, illustrating how a CBAM embeds strategic interdependence.
On the opportunity side, CBAMs may become an increasingly strategic tool to curb asymmetries in environmental regulation.
Ultimately, a CBAM should be viewed as one tool in a broader climate policy mix. Its success will depend not only on technical design but also on international cooperation, regulatory consistency, and the ability of the European Union to link competitiveness to decarbonization credibly and constructively. Recent developments in global trade policy could further shape the role of the CBAM—both as an opportunity and a risk.
On the opportunity side, CBAMs may become an increasingly strategic tool to curb asymmetries in environmental regulation. As more jurisdictions move to strengthen domestic industries while promoting decarbonization, mechanisms like a CBAM can reinforce a global shift toward cleaner production. The European Union’s new omnibus initiative supports this trajectory, tying industrial competitiveness more explicitly to environmental ambition and proposing a revised, streamlined CBAM framework. At the same time, the effectiveness of such reforms will depend on how simplification balances administrative feasibility with environmental integrity and incentive strength.
Yet, the risks are equally pressing to consider. Retaliatory trade measures, including potential responses from major trading partners such as the United States, could undercut the climate objectives of the CBAM and exacerbate policy fragmentation. Moreover, the long-term credibility of CBAM policy hinges on regulatory stability: if future reforms are perceived as inconsistent or politically driven, the power of a CBAM to shape expectations and support investment in low-carbon transitions could be weakened significantly.
A version of this article appeared in print in the Spring/Summer 2026 issue of Resources magazine.
