Highlight 40/2024: The Impacts of the European Union Carbon Border Adjustment Mechanism on Developing Countries
Junior Alexander, 11 November 2024
The European Union (EU) continues to demonstrate its leadership role in the fight against climate change, setting ambitious goals and implementing stringent policies. In 2021, the EU introduced its Fit for 55 package, a comprehensive collection of initiatives aimed at reducing greenhouse gas (GHG) emissions by 55%, relative to 1990 levels by 2030. The package also revised the European Union Emissions Trading System (EU-ETS)—a cap-and-trade mechanism that targets several carbon-intensive industries, including the energy and industrial sectors. In place since 2005, the EU ETS is the first and remains the world’s largest cap-and-trade system.
In redesigning the EU-ETS, the EU anticipated the risk of « carbon leakage », where firms may either relocate production or outsource from outside the EU where emission controls are less stringent. To counter this, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), a carbon border tariff applied to the importation of goods with high emission levels entering the EU. These goods include aluminum, iron and steel, cement, fertilizers, electricity, and hydrogen. CBAM’s transitional period is from 2023 until 2025, allowing both EU and non-EU entities time to align with the new guidelines.
As the first carbon border tariff, CBAM is expected to encourage the EU’s trading partners to adopt similar climate policies to meet EU import standards. However, this shift may pose challenges for developing and least-developed countries (LDCs), which often lack the technical and financial capacity to meet stringent emissions regulations. An UNCTAD analysis suggests that—due to the limitations of developing economies—developed countries’ incomes may increase by US$ 2.5 billion, while developing countries could incur losses of US$ 5.9 billion. To address this, the EU has incorporated measures such as technical assistance into CBAM implementation to support developing economies in the transition process.
Another factor that may further complicate the implementation of CBAM is the ongoing debate over its compliance with the World Trade Organization’s (WTO) non-discrimination principle. Inadvertently, CBAM may lead to further fragmentation of the international market, with clean, low-carbon products flowing to developed economies like the EU, while emissions-intensive products concentrate in developing markets. This could be an unintended and potentially counterproductive consequence of CBAM for global climate goals. Adhering to WTO non-discrimination standards may provide some assurance that trade policy supports climate objectives without disproportionately impacting economies with fewer resources to adjust.
In my opinion, the EU ETS and CBAM will play crucial roles in encouraging a global low-carbon transition. Nevertheless, leveraging the support of Public-Private Partnerships (PPP) in the development and implementation of such carbon policies, may help mitigate potential carbon leakages. To avoid market fragmentation and ensure that developing economies are not significantly disadvantaged, global partnerships are essential. Complex and cross-cutting carbon border adjustment regimes require global partnership at all levels to create fair, inclusive standards, ensuring that no one is truly left behind in the transition to a sustainable, low-carbon future.
Junior Alexander, Highlight 40/2024 – The Impacts of the European Union Carbon Border Adjustment Mechanism on Developing Countries, 11 November 2024, available at www.meig.ch
The views expressed in the MEIG Highlights are personal to the authors and neither reflect the positions of the MEIG Programme nor those of the University of Geneva.