(column hosted by CFA Society Netherlands for Investment Officer 25 June 2025. Their publication can be found here)
Dr. Amir Moradi
Lead Researcher at the HAN International School of Business
After the transitional phase of 2023-2025, the European Union Carbon Border Adjustment Mechanism (CBAM) will impose a carbon tariff on imported carbon-intensive goods on 1 January 2026. The CBAM aims to mitigate the persistent challenge of “carbon leakage” and create a level playing field by harmonizing carbon pricing between domestically produced and imported goods, including iron and steel, cement, chemical fertilizers, aluminum, electricity, and hydrogen and in certain precursor sectors. The CBAM also intends to enhance awareness of carbon reduction efforts among countries (Lim et al., 2021) and support domestic production and competitiveness within the EU.
The introduction of CBAM has raised several concerns, a few of which are listed below:
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Does it accelerate climate action in the energy-intensive industries within the EU? (Gore, 2021)
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Does it ensure that producers in low-income and climate-vulnerable countries are not subjected to unfair disadvantages? (Gore, 2021; Sun et al., 2024)
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Does it provoke trade conflicts and retaliatory measures as a result of its imposition of unilateral tariffs? (Lim et al., 2021; Sun et al., 2024)
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Does it comply with WTO rules and regulations? (Eicke et al., 2021)
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Does it measure carbon emissions on a fair basis considering all three scope emissions? (Su et al., 2024)
In addition, this EU tool will affect exporting countries to Europe. A considerable body of academic research focuses on its impact on major economies, while fewer studies examine its effects on developing countries. These studies typically apply predictive models and empirical data, and some findings are summarized below.
China: According to the International Energy Agency (IEA), China was responsible for 31.1% of global CO2 emissions derived from combustible fuels in 20221. By calculating the embodied carbon content of Chinese steel exports between 2000 and 2020, Li et al. (2021) conclude that the CBAM will significantly impact Chinese steel exports to Europe, reducing the profit margin from an average of 4.3% to an unprofitable area. They conclude that this will eventually force China to negotiate with the EU under the WTO framework. In another study, Qi et al. (2022) find that the CBAM negatively affects the cost efficiency within China’s steel and cement industries. They consider various scenarios for the carbon price in China (ranging from 0 to 100 RMB/ton, or 0-12.1 €/ton) and in Europe (ranging from 300 to 900 RMB/ton, or 36.3-109.2 €/ton), and conclude that if the carbon price in China surpasses RMB60 per ton (€7.3 per ton) with limited fluctuations, the significance of the CBAM impact diminishes as cost efficiency decreases. In other words, while a higher carbon price in China may reduce the CBAM surcharge, it also raises China's production costs, creating a trade-off: reduced exposure to the CBAM but increased internal costs.
The U.S.: Overland and Sabyrbekov (2022) introduce the CBAM Opposition Index for countries exporting CBAM-applicable goods to the EU. They identify the U.S., along with several other countries, as a significant potential opponent of CBAM. Furthermore, they emphasize that EU coordination with China and the U.S. is essential for the success of CBAM. This coordination becomes more important considering President Trump’s current tariff uncertainties.
Japan: Takeda and Arimura (2024) analyze the Japanese industries and economy after CBAM by employing quantitative analysis. They deduce that energy-intensive and trade-exposed (EITE) industries will be slightly negatively affected. Japan’s GDP and welfare are likely to improve, as the country produces relatively few carbon-intensive goods, facing significantly lower carbon tariffs compared to other nations. Consequently, Japan will be better positioned in the market and able to increase exports to the EU.
Developing countries: Eicke et al. (2021) analyze the relative risks associated with the CBAM on exports to the EU by developing an index that incorporates exposure and vulnerability factors. Their findings indicate that the highest relative risks are observed in African countries, followed by non-EU Eastern European nations. This is largely due to high-emission energy systems, low export diversification, and limited resources (such as green finance and advanced technology) for transitioning to low-carbon alternatives. Furthermore, the authors emphasize that smaller developing countries encounter greater relative risks compared to larger emerging economies, which can be attributed to the size of their internal markets and their statistical capacity for monitoring, tracking, and verifying the carbon content of products. Gore (2021) suggests utilizing revenues generated by the CBAM to facilitate the modernization of supply chains in low-income countries, aiming for a transition to less carbon-intensive production methods.
In conclusion, the full implementation of CBAM is likely to address the challenge of carbon leakage and stimulate a level playing field in the EU, but it is important to consider the associated concerns. For example, the EU should frame CBAM as a tool for climate leadership rather than a trade impediment; failing to do so could result in reciprocal tariff impositions. Additionally, the EU must address concerns regarding data compliance by providing clearer guidelines for collecting carbon data from suppliers and sub-suppliers. While the initial impact of CBAM may negatively affect major players, they can improve their procedures over time. However, small and low-income economies will require EU support to modernize their supply chains.
References:
Eicke, L., Weko, S., Apergi, M., and Marian, A. (2021): Pulling up the carbon ladder? Decarbonization, dependence, and third-country risks from the European carbon border adjustment mechanism. Energy Research & Social Science, Volume 80, 102240. https://doi.org/10.1016/j.erss.2021.102240
Gore, T. (2021): The proposal for a Carbon Border Adjustment Mechanism fails the ambition and equity tests. Heinrich-Böll-Stiftung European Union. https://eu.boell.org/en/2021/09/13/proposal-carbon-border-adjustment-mechanism-fails-ambition-and-equity-tests
Li, W., Liu, X., and Lu, C. (2023): Analysis of China's steel response ways to EU CBAM policy based on embodied carbon intensity prediction. Energy, Volume 282, 128812. https://doi.org/10.1016/j.energy.2023.128812
Lim, B., Hong, K., Yoon, J.I., and Cheong, I. (2021): Pitfalls of the EU’s Carbon Border Adjustment Mechanism. Energies, Volume 14, Issue 21. https://doi.org/10.3390/en14217303
Overland, I. and Sabyrbekov, R. (2022): Know your opponent: Which countries might fight the European carbon border adjustment mechanism? Energy Policy, Volume 169, 113175. https://doi.org/10.1016/j.enpol.2022.113175
Qi, S., Xu, Z., and Yang, Z. (2022): China's carbon allowance allocation strategy under the EU carbon border adjustment mechanism: An integrated non-parametric cost frontier approach. Science of The Total Environment, Volume 831, 154908. https://doi.org/10.1016/j.scitotenv.2022.154908
Rossetto, D. (2023): The carbon border adjustment mechanism: What does it mean for steel recycling? Sustainable Horizons, Volume 5, 100048. https://doi.org/10.1016/j.horiz.2023.100048
Sun, X., Mi, Z., Cheng, L., Coffman, D., and Liu, Y. (2024): The carbon border adjustment mechanism is inefficient in addressing carbon leakage and results in unfair welfare losses. Fundamental Research, Volume 4, Issue 3, Pages 660-670. https://doi.org/10.1016/j.fmre.2023.02.026
Takeda, S. and Arimura, T.H. (2024): A computable general equilibrium analysis of the EU CBAM for the Japanese economy. Japan and the World Economy, Volume 70, 101242. https://doi.org/10.1016/j.japwor.2024.101242
in Externe publicatie door Amir Moradi