INTRODUCTION
The accelerating climate crisis has compelled the government to adopt strict environmental policies to curb greenhouse gases, especially carbon dioxide (CO2). Carbon Border Adjustment Mechanism (CBAM) is one of the policies introduced by the European Union (EU) as a part of its broader climate policy ‘Fit for 55’, in 2021.[1] Fit for 55 is an EU growth strategy that is working to reduce the net greenhouse gas emissions by 55% from the levels in 1990 and achieve climate neutrality by 2050.[2] It represents a major shift in global trade and environmental policies, aiming to tackle carbon leakage by putting an EU equivalent carbon price on imports under the EU Emissions Trading System (ETS).[3]
The policy’s primary goal is to achieve decarbonisation, in which the companies shift production to areas with lenient environmental regulations, thereby considering global climate efforts. While it’s true that the above-mentioned mechanism promotes fair competition, many developing nations have raised concerns related to the distributive and economic effects. They also claim that this is hindering their economic growth in key areas and access to the global market. Critics openly argue that this mechanism is going to adversely impact the nations having carbon-intensive industries and limited technologies for working on decarbonisation. Subsequently, the introduction of CBAM has sparked debate and raised complex questions as to whether it is a part of a greater climate initiative or is just another step for green perfectionism.
UNDERSTANDING THE CARBON ADJUSTMENT BORDER MECHANISM
CBAM is a significant trade-related instrument that has been passed by the EU.[4] It imposes carbon-prices on imports in order to build up a level playing ground internationally for EU producers and encourage a reduction in carbon emissions. The transitional phase for the CBAM was initiated on 31st October, 2023.[5] The reporting requirements for products like steel, cement and fertilisers began in January 2024. During this phase, importers need to declare the carbon emissions in their goods or commodities. In this way, they are ready for the full implementation by January, 2026. Then, their financial obligations would require them to buy certificates for CBAM for carbon emissions in their imported goods.
CBAM certificates are accurately designed to reflect the absolute cost of carbon paid by EU producers in compliance with the EU ETS. This makes similar goods subject to an identical carbon pricing regime, enabling fair competition in the market and aligning international trade practices with the EU climate policy goals. Some clauses might change in the course of negotiation and after the end of the transition period in 2026. As per the EU’s perspective, countries could face unwanted impediments without this policy, and foreign rivals would manufacture similar products without incurring similar costs. The CBAM, however, imposes a carbon charge at the border, eventually expanding the EU’s climate policy to include producers of all countries on a global scale.
ECONOMIC AND TRADE IMPLICATIONS FOR DEVELOPING COUNTRIES
There are significant effects on the trade patterns of developing nations with the introduction of CBAM. Many globally emerging economies rely on heavy industrial exports that include steel, cement, and aluminium, which are specifically targeted by this policy mechanism. Since the production in these economies often depends on energies given out by fossil fuels, the carbon intensity of their exports is generally large compared to the products that are manufactured in areas with clean energy.
This means that producers from developing countries might have to incur extra expenses in the sale of their products in the EU market. The mandatory law to acquire the CBAM certificates raises the price for carbon-intensive imports, which could probably reduce their competitiveness in comparison to the goods manufactured in the EU. This may lead to reduced exports and declining market shares.
According to UNCTAD-based economic modelling, a few of the developing regions are most probably going to experience measurable declines in export value in CBAM-covered sectors, which have been estimated at losses of up to $10.2 billion in income and sectoral export contractions (for instance, up to 13.9% in aluminium and 8.2% in iron and steel in African economies). This reflects a structural shift in trade patterns in favour of carbon-efficient developed economies and raises concerns about widening global trade asymmetries[6]. South Asia, Southeast Asia and some areas of Africa may be specifically vulnerable and at risk due to their dependence on carbon-intensive industrial production. Thus, the EU’s policy may change the contemporary trade flows by incentivising EU importers to obtain source products from countries having lower carbon intensity or from the EU’s domestic producers.
INSTITUTIONAL CHALLENGES AND COMPLIANCE COSTS
In addition to the direct carbon tax paid by producers of carbon-based economies, imposed through CBAM certificates, they also have to comply with intensive verification and reporting compliance. Importers are supposed to provide detailed data on the carbon emissions in their products, which includes information on the consumption of energy, the production process and factors of emissions.[7]
The implementation of the necessary monitoring, reporting and verification systems is a significant problem for many developing economies. They also often have no strong emission accounting systems in their industrial sectors, and companies might have to invest in new technologies and administrative procedures to meet the requirements of the EU regulations. Small and medium-sized businesses are the ones who tend to bear a disproportionate compliance cost since they usually have limited finances and technical capacities to do so.
Additionally, the governments of developing nations can face institutional limitations when trying to promote domestic industries during the process of transition to low-carbon production. Access to climate finance, technological expertise, and infrastructures in renewable energy is also limited, which makes it even more difficult than reducing the carbon intensity of industrial output. As a result, although the mechanism aims at boosting cleaner production in the global economy, its application might place irrelevant pressure on economies that have fewer resources to adjust.
CLIMATE JUSTICE AND EQUITY CONCERNS
CBAM also poses wider issues of fairness and equity in global climate control. The developing nations are complaining that the mechanism fails to take due consideration of the principle of the common but differentiated responsibilities, which is one of the pillars of global climate agreements.[8] This principle acknowledges the fact that developed nations have higher historical responsibility towards the emission of greenhouse gases and thus they should contribute more to solving the problem of climate change.
Critics have argued that CBAM, in effect, is transferring some of the price of climate reduction to developing nations since it imposes a penalty on carbon-intensive exports, but gives a limited amount of financial and technological help for decarbonisation. In this view, the mechanism can enhance the already existing inequalities in the global economic frameworks by placing extra costs on economies which are still in their industrialisation phase.
Now, the people who support the policy advocate for the requirement of CBAM to guarantee the efficacy of the domestic climate policies of the EU, and they further contend that when such a mechanism is absent due to the tightening of environmental laws, the relocation of industrial production to jurisdictions with less stringent regulations can occur as aftermath and thereby leading to no impact on the reduction of global emissions.
But this justification raises significant concerns under WTO law because, on prima facie, CBAM may conflict with core GATT principles such as Most Favoured Nation (Article I) and National Treatment (Article III), due to its differential burdens on imported goods[9]. The EU can try to justify the mechanism given under Article XX(b) or (g) as an environmental measure, but such a justification would require demonstrating that the measure is neither arbitrary nor a disguised restriction on international trade.[10]
CONCLUSION
CBAM signifies a transformative development that represents an excellent intersection between climate policy and global trade. The European Union aims to discourage carbon leakage by imposing a price on imported carbon in order to reinforce the regulation of the environment. However, this mechanism can create considerable challenges for developing economies whose development is based on exports of carbon-intensive goods; this will hinder their competitiveness in the EU markets due to higher production and compliance costs. The issues of equity and historical responsibility also make the discussion more complex. To be effective and fair, a strong international cooperation, including climate financing, technology transfer and capacity building, is needed to balance environmental goals and developmental needs of the emerging economies through CBAM.
Authors Name: Kanu Priya & Akshat Kumar (National University of Study and Research in Law, Ranchi)
References:
[1] European Commission, ‘Fit for 55’: Delivering the EU’s 2030 Climate Target on the Way to Climate Neutrality COM (2021) 550 final.
[2] Ibid.
[3] Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community [2003] OJ L275/32.
[4] Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism [2023] OJ L130/52.
[5] Ibid
[6] Zero Carbon Analytics, ‘Carbon Border Adjustment Mechanisms Require Coordinated Global Action’ (November 2024)
[7] European Commission, Impact Assessment Report Accompanying the Proposal for a Carbon Border Adjustment Mechanism SWD (2021) 643 final.
[8] United Nations Framework Convention on Climate Change (adopted 9 May 1992, entered into force 21 March 1994) 1771 UNTS 107.
[9] Sambhav A, ‘Legal Analysis of Carbon Border Adjustment Mechanism within the World Trade Organization Framework’ (2024) SSRN
[10] CarbonSettle, ‘CBAM and WTO Rules: Trade Law Implications’ (3 February 2026)
