The Carbon Border Adjustment Mechanism is, in its own terms, a parity instrument. It does not attempt to punish foreign producers. It attempts to ensure that imported goods face the same carbon cost as goods produced within the European Union under the Emissions Trading System. EU producers pay for emissions allowances under the ETS. CBAM extends that logic to the border: importers of steel, aluminium, cement, fertilisers, hydrogen and electricity must now purchase CBAM certificates priced at the weekly average ETS auction price, currently averaging €84.50 per tonne of CO2, to cover the embedded emissions in their goods. If an exporter can demonstrate that they have already paid an equivalent carbon price in their home country, that cost is deductible from their CBAM liability. The transitional reporting period ran from 1 October 2023 through 31 December 2025. On 1 January 2026, the financial obligation began. The mechanism is live.
What CBAM is not is a climate finance instrument. It does not transfer resources toward the decarbonisation of exporting economies. It does not provide preferential access to green technology. It does not accelerate the energy transition in the countries most exposed to its costs. It is a border measure: it adjusts the price of imports, and it directs the revenue that adjustment generates into the EU's own budget. The European Parliament Research Service confirmed in 2025 that no formal commitment exists to redirect any portion of CBAM revenue to developing country exporters. The mechanism addresses carbon leakage within the EU system. It does not address the development asymmetry that makes decarbonisation affordable in Germany and financially prohibitive in Ethiopia.
The EU ETS is the largest and most liquid carbon market in the world. It covers approximately 10,000 industrial installations across the European Union and generates the price signal that CBAM certificate costs are calculated from. At €84.50 per tonne in the fourth quarter of 2025, the EU carbon price is among the highest in the world. It is also, by design, on an upward trajectory as the cap on total allowances tightens and free allocations to industry diminish on a legislated schedule. By 2034, the free allowances that currently cushion EU producers from their own ETS exposure will be eliminated entirely, completing the transition to full cost internalisation for European industry. CBAM's free allowance phaseout schedule mirrors this timeline precisely, meaning that the CBAM cost burden on importers grows in tandem with the cost burden on EU producers.
The gap between the EU carbon price and the price in every other major carbon market is structurally significant. China's national ETS, which currently covers the power sector and is scheduled for expansion to steel and aluminium in 2026 and 2027 according to the Ministry of Ecology and Environment and BloombergNEF, trades at CNY 92 per tonne, approximately $12.80. The EU price is roughly six and a half times the Chinese price. This differential is not incidental; it is the entire reason CBAM exists. If carbon prices were converging globally, CBAM would be unnecessary. The fact that they are not converging, and that the gap between the EU and major developing economy carbon prices runs from a factor of six for China to an order of magnitude for countries with no carbon pricing at all, is the structural condition that CBAM is attempting to manage.
| Year | Free Allowances Remaining | CBAM Cost Exposure | India Effective Tariff Trajectory | Status |
|---|---|---|---|---|
| 2026 | 100% | Minimal (reporting baseline) | ~2–5% (low liability phase) | Low Exposure |
| 2027 | 97.5% | Marginal increase | ~5–8% | Low Exposure |
| 2030 | 51.5% | Substantial — near half-parity | 25–32% (GTRI/Exim Bank estimate) | High Exposure |
| 2034 | 0% | Full parity — no free allowances | Maximum exposure — full carbon cost differential | Full Levy |
Carbon leakage is a genuine policy problem. If European steel producers face a carbon cost of €84.50 per tonne of CO2 while their competitors in India or Turkey face no equivalent cost, the competitive asymmetry creates an incentive to shift production. EU output contracts; imports from lower-regulation jurisdictions increase; EU emissions fall while global emissions remain unchanged, or even rise if the replacement production is more carbon-intensive than what it displaced. This is not a hypothetical. It is the mechanism that carbon policy economists identified as the central vulnerability of unilateral carbon pricing in the 1990s and that EU policymakers were trying to address through CBAM from the first serious proposals in the early 2000s onward.
The CBAM solution to leakage is conceptually coherent: if imports face the same carbon cost as domestic production, the incentive to relocate production disappears. The EU simultaneously shields its own producers from competitive disadvantage and removes the carbon arbitrage opportunity that leakage exploits. The mechanism does what it claims to do within the EU system. The more contested question is what it does beyond the EU system. CBAM reduces leakage risk for European industry. Whether it reduces global emissions depends on a different set of conditions: whether exporters respond to CBAM costs by decarbonising their production, or by redirecting their exports to markets that impose no carbon border measure. The evidence on that question, examined in the following sections, is already in and the initial direction is not encouraging.
India exported 3.2 million tonnes of steel to the European Union in FY2024-25, with a value of $4.8 billion, according to Eurostat and the Ministry of Commerce and Industry. India's blast furnace basic oxygen furnace route, the dominant production method accounting for the overwhelming majority of Indian crude steel output, produces 2.5 tonnes of CO2 per tonne of steel. The EU CBAM benchmark for steel is 1.4 tonnes of CO2 per tonne. The gap, 1.1 tonnes per tonne of steel, is the emissions differential on which CBAM liability is calculated. At €84.50 per tonne of CO2 and 3.2 million tonnes of annual steel exports, the arithmetic of India's exposure is not abstract: the Global Trade Research Initiative and Exim Bank of India estimate the annual CBAM liability at $1.1 billion to $1.6 billion per year by 2030, rising to an effective tariff of 25 to 32 per cent as free allowances diminish.
India is not alone in this exposure, though it is the largest single developing economy affected. Turkey faces an estimated €1.2 billion annual liability, concentrated in its steel and cement export sectors, according to UNCTAD and the Turkish Exporters Assembly. South Africa faces an estimated $450 million annual liability, with iron, steel and ferrochrome as the primary exposure sectors according to the South African Iron and Steel Institute and UNCTAD. The aggregate picture is captured in UNCTAD's Trade and Development Report 2024, which estimates that CBAM could reduce exports from developing countries to the EU by 1.4 to 2.4 per cent in value terms. That range sounds modest in aggregate. For the steel sectors of India, Turkey and South Africa, where EU market access is a significant component of industrial strategy, it is not modest at all.
The two scenarios that CBAM's design anticipated are not equally hypothetical. The first scenario holds that exporters facing CBAM costs will invest in cleaner production to maintain EU market access. The second holds that exporters will redirect their goods to markets without carbon border measures, leaving EU imports to decarbonise while global production patterns shift rather than transform. The first scenario is the intended mechanism of CBAM as a climate instrument. The second scenario is already occurring.
India increased steel exports to MENA and Southeast Asian markets by 14 per cent since mid-2023, according to WTO Trade Monitoring Report and IISS data for 2025. Turkey's comparable reorientation toward non-EU markets since mid-2023 registers a 9 per cent increase in the same direction. These are not large moves in the context of total trade volumes, and they are partly driven by factors unrelated to CBAM, including currency dynamics, regional demand conditions and global steel overcapacity. However, they are directionally consistent with Scenario B. OECD Steel Committee data for 2025 estimates global steel overcapacity at 620 million tonnes, with steel prices on a soft trajectory running approximately 5 per cent below the prior year. An oversupplied market with abundant alternative buyers is precisely the condition under which trade diversion, rather than decarbonisation investment, becomes the rational commercial response to a new border cost.
“India increased steel exports to MENA and Southeast Asia by 14 per cent since mid-2023. Turkey moved in the same direction by 9 per cent. The decarbonisation scenario assumes producers absorb the cost and invest in green steel. The diversion scenario assumes they find alternative buyers. In a market with 620 million tonnes of global overcapacity and soft prices, alternative buyers are not hard to find.”
The case for Scenario A, the decarbonisation pathway, is not absent. The EU market is significant enough, and the long-run trajectory of CBAM costs steep enough, that large steel producers with significant EU exposure may find green investment rational over a 10 to 15 year horizon. Green steel using hydrogen direct reduction costs $750 to $950 per tonne against $450 to $550 for conventional blast furnace production, according to IEA and BloombergNEF 2025 figures: a premium of 40 to 70 per cent depending on hydrogen cost. That premium is currently prohibitive for producers competing in a soft market. It is less prohibitive if the alternative is a 25 to 32 per cent effective tariff on the EU market by 2030. The question is whether the timeline for investment decision, construction, commissioning and market response aligns with the CBAM cost escalation schedule. For most producers in India, Turkey and South Africa, that alignment is challenging.
The European Commission projects CBAM will generate €9.1 billion annually by 2030 at full implementation. This revenue accrues to the EU's own resources, the general budget mechanism that funds EU expenditure across all programmes. The European Parliament Research Service confirmed in 2025 that no formal legislative commitment exists to redirect any portion of this revenue to developing country exporters to support their decarbonisation. This is not an oversight. It is a deliberate design choice reflecting the EU's position that CBAM is a competitiveness and leakage measure, not a development finance instrument, and that climate finance is a separate policy track addressed through separate mechanisms including the Green Climate Fund and the EU's Global Gateway programme.
The separate policy tracks are not equivalent in scale to the problem. The loss and damage fund, established at COP28 to compensate developing countries for climate-related losses, had received $800 million in pledges by the time of COP29 and had actually disbursed under $15 million as of February 2026, primarily for technical assistance rather than substantive adaptation or transition investment, according to UNFCCC and COP presidency reports. Global steel sector decarbonisation alone requires $4.4 trillion in total investment to 2050 according to IEA Net Zero by 2050 analysis, with approximately 60 per cent of new capacity investment needing to occur in emerging economies. The gap between a loss and damage fund that has disbursed under $15 million and an investment requirement measured in trillions is not a gap in funding architecture. It is a gap in political will.
Carbon capture and storage for cement production costs $65 to $120 per tonne of CO2 captured, according to the Global CCS Institute and IEA Technology Perspectives 2024. This is the technology without which cement, a structurally difficult sector to decarbonise because the CO2 is released by the chemical process of calcination rather than by combustion alone, cannot reach net zero. A cement producer in Morocco or Egypt facing CBAM costs must in principle invest in either clinker substitution, carbon capture or both to maintain EU market access. The capital cost of that investment, at borrowing rates available to North African industrial companies, is substantially higher than the same investment made by a European company with access to EU subsidy mechanisms, guaranteed offtake and concessional finance. CBAM charges the same certificate price regardless of the borrowing cost differential. It treats a Moroccan cement company and a German cement company as equivalent payers of a carbon price, while their access to capital for the investment needed to reduce that price is anything but equivalent.
For aluminium, decarbonisation depends primarily on the transition to renewable-powered smelting. The energy intensity of electrolytic aluminium production means that the carbon intensity of the electricity grid directly determines the product's lifecycle emissions. A smelter powered by coal-fired electricity, which describes the majority of aluminium production in China and a significant share in India, carries an extremely high embedded carbon footprint. Transitioning that smelter to renewable power is a grid-level investment, not a plant-level one, and it requires the regulatory and market conditions under which renewable energy investment is commercially viable. CBAM creates a financial incentive for that transition. It does not create the grid, the renewable capacity, the regulatory framework or the capital that the transition requires.
CBAM operates through embedded carbon measurement: importers must report, and from 2026 pay for, the actual lifecycle emissions embedded in their goods. This requires monitoring, reporting and verification systems capable of tracking emissions through complex supply chains, from raw material extraction through primary processing to the finished product at the EU border. Large multinational exporters with dedicated compliance teams and sophisticated IT infrastructure can build these systems, at cost. The compliance cost is real but manageable for producers of sufficient scale and organisational capacity. For smaller producers in developing economies, the administrative burden of CBAM compliance may function as a de facto non-tariff barrier that effectively excludes them from the EU market before the financial cost of the certificate even becomes relevant.
The capacity asymmetry embedded in CBAM's compliance architecture reflects a structural feature of carbon policy more broadly: the sophistication required to participate in modern carbon market systems is not evenly distributed. India's Carbon Credit Trading Scheme, notified on 28 June 2023 and currently in its compliance phase covering 11 core industrial sectors according to the Bureau of Energy Efficiency and MoEFCC, is building exactly this capacity. But building the institutional architecture for a credible, internationally recognised carbon pricing and verification system takes years. CBAM's financial obligations are already live. The institutional capacity required to qualify for liability reduction through domestic carbon price credits is still being constructed across much of the developing world.
The EU has designed CBAM to comply with WTO non-discrimination principles by applying equivalent carbon costs to both domestic EU producers and importers. The argument is that CBAM is not a tariff in disguise but a carbon parity measure: EU producers pay for their carbon through the ETS, and importers pay for their embedded carbon through CBAM, so no nationality-based discrimination occurs. Whether this argument survives a full WTO panel adjudication remains untested. India, China and South Africa have raised formal trade concerns at the WTO Committee on Trade and Environment 14 times since 2023 according to the WTO dispute settlement database, but no formal panel has been initiated as of early 2026. The reluctance to trigger formal dispute settlement likely reflects both uncertainty about the legal outcome and the diplomatic costs of a direct confrontation with the EU over climate policy.
The more significant long-term question is not whether CBAM is WTO-compliant in isolation but what happens when other major economies adopt comparable measures using divergent methodologies. The United States Congress has had the PROVE IT Act, which mandates lifecycle emissions measurement for comparison purposes, and the Clean Competition Act under review, both of which mirror CBAM logic in the domestic political context of protecting American industry from lower-carbon-cost competition. The United Kingdom is developing its own carbon border adjustment. If the major advanced economies adopt CBAM-equivalent measures with different benchmark emissions, different sector coverage, different compliance requirements and different certificate prices, global trade does not face a unified carbon pricing signal. It faces a fragmented set of carbon border regimes, each optimised for the political economy of the jurisdiction that designed it, imposing cumulative compliance burdens on exporters that must navigate multiple systems simultaneously.
The most credible long-run climate impact of CBAM may not be the direct emissions reduction from decarbonised imports. It may be the institutional pressure it creates for domestic carbon pricing adoption in exporting economies. Under CBAM, a country that implements an equivalent domestic carbon price reduces or eliminates its exporters' CBAM liability, because the cost has already been paid domestically and the revenue stays home rather than flowing to Brussels. This creates a genuine fiscal and industrial incentive for carbon pricing adoption: governments that price carbon domestically capture the revenue that would otherwise accrue to the EU. For a finance ministry managing fiscal constraints, that argument has concrete appeal.
India's Carbon Credit Trading Scheme, notified in June 2023 and covering 11 industrial sectors, represents exactly this kind of institutional response. It is not yet operating at a carbon price level or with the verification infrastructure that would qualify for formal CBAM equivalence under European Commission criteria. But its direction of travel is consistent with the diffusion logic. China's ETS expansion to steel and aluminium in 2026 and 2027 will bring the world's largest steel producer into a domestic carbon pricing regime that, while priced far below the EU level, is nonetheless a credible institutional step. The World Bank's State and Trends of Carbon Pricing 2025 records 75 carbon pricing initiatives globally, covering 24.1 per cent of global GHG emissions, up from near zero in 2005. Whether CBAM is accelerating that diffusion or whether the diffusion would have occurred regardless is a counterfactual that cannot be resolved cleanly. What is clear is that the direction of travel in global carbon pricing is toward greater coverage, and CBAM is part of the institutional environment that makes that direction politically easier to sustain.
The answer, on current evidence, is: conditionally, partially, and less than it would if it were accompanied by the climate finance and technology transfer that its design omits. Within the EU, CBAM is achieving its primary objective. It is removing the competitive asymmetry that would otherwise create pressure to weaken the EU ETS, and it is beginning to shift the incentive structure for major exporters with significant EU market dependence. The policy diffusion channel is real: India's CCTS and China's ETS expansion are partly a response to the institutional pressure that CBAM creates. The total share of global emissions under carbon pricing has grown to 24.1 per cent and continues to grow, a trajectory that CBAM is reinforcing if not solely generating.
Beyond the EU, the evidence is less favourable. The diversion data from India and Turkey since mid-2023 shows that trade reorientation is occurring alongside, and in some cases instead of, decarbonisation investment. Global steel overcapacity of 620 million tonnes provides ample alternative markets for producers who choose not to meet EU carbon standards. The capital cost of green steel at a 40 to 70 per cent premium over conventional production is prohibitive for producers facing soft steel prices and high borrowing costs simultaneously. The loss and damage fund has disbursed under $15 million against a backdrop of trillion-dollar investment requirements. The CBAM revenue that could begin to close that gap is going into the EU's general budget without a formal commitment to redirect any of it toward the countries bearing the transition cost.
A mechanism that prices carbon at the border but does not fund the transition it demands is not wrong. It is incomplete. Carbon pricing changes incentives. Changed incentives, without changed capacity, change trade routes rather than production systems. CBAM is a mechanism. It is not a climate strategy. A climate strategy for the Global South would combine a credible carbon price signal with technology transfer, concessional capital access, administrative capacity building and a meaningful share of CBAM revenue directed toward the decarbonisation of the economies that are being asked to pay for a transition they did not design and cannot yet afford.
The Carbon Border Adjustment Mechanism became a financial reality on 1 January 2026. India faces an estimated $1.1 billion to $1.6 billion annual liability by 2030. Turkey faces €1.2 billion. South Africa faces $450 million. The EU will collect €9.1 billion annually at full implementation. None of that revenue is formally committed to supporting the decarbonisation of the countries it is collected from. The loss and damage fund has disbursed under $15 million. Green steel costs 40 to 70 per cent more than conventional. The IEA requires $4.4 trillion in steel sector investment to 2050, with 60 per cent from emerging economies.
CBAM is correct that carbon leakage is a problem. It is correct that imports should face an equivalent carbon cost to domestic production. It is correct that the incentive to relocate production to avoid the ETS must be addressed. These are legitimate policy objectives and CBAM addresses them. What CBAM does not address is the asymmetry between the obligation it creates and the capacity it presupposes. It assumes that exporters have the capital to invest in green production, the institutional infrastructure to participate in carbon markets, and the administrative capacity to comply with monitoring and verification requirements. For the largest emerging economy exporters, those assumptions are partly true and partly aspirational. For smaller producers and least developed countries, they are mostly aspirational.
CBAM signals that carbon intensity now carries border consequences. That signal is necessary and overdue. Whether it lowers global emissions or primarily redistributes industrial advantage depends on whether the EU and the broader advanced economy bloc treat CBAM revenue as a climate finance instrument rather than a budget line. On current design, it is a budget line. On current evidence, it is producing both decarbonisation pressure and trade diversion simultaneously. The climate outcome will be determined by which of those two responses wins over the next decade, and that determination will not be made by the mechanism alone. It will be made by the presence or absence of the financing, the technology transfer and the institutional support that CBAM, by itself, does not provide.