Carbon Border Adjustment Mechanism: need for thoughtful design

The principle underpinning the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) is, on the face of it, a compelling one. If domestic producers are compelled to act and costs are imposed to cut carbon emissions, it is only fair to extend a similar cost to goods imported from places without comparable rules. Otherwise, the domestic industry is at a disadvantage, and emissions simply shift across borders rather than reduce globally. 

From that perspective, CBAMs are conceptually attractive: they level the playing field, protect environmental ambition, and send a price signal to lagging jurisdictions. It’s a market-based approach to encourage low-carbon production worldwide. 

Why is it proving to be as contentious as it is?

One starting consideration is that of equity. CBAMs, if well-designed, advance both climate action and climate justice. But that takes finesse. At the heart of any just climate policy lies the principle of “polluter pays” and the broader framework of “common but differentiated responsibilities”. Rich countries, which have emitted more historically and industrialized earlier, need to bear more of the cost—and provide real finance to developing and emerging nations, and allow space for others to develop sustainably. A CBAM that penalizes poorer producers in developing countries without offering support or alternatives isn’t fair—and exacerbates the historic dues of higher emitting countries. It is essential for CBAMs to walk the talk on this in both CBAM design and climate finance.

The other accusation levelled against CBAM is that it is restrictive trade practice disguised as climate action. If a CBAM is or appears to be a tool for trade protectionism or diplomatic arm-twisting, it loses credibility and undermines the climate cause. We can’t afford that. If we’re going to dress up a trade barrier as a climate measure, we shouldn’t be surprised when everyone else does the same. That takes nobody and nothing forward.

It’s worth remembering that CBAMs aren’t exclusively European. There is growing appeal for it, in the U.S., the U.K., and beyond. That makes it even more essential to separate climate ambition from geopolitical point-scoring. The only real way for CBAMs to hold their legitimacy is to hold their purpose: to reduce emissions globally in a fair and effective way.

Another question is when will CBAMs get implemented. While pronouncements suggest imminent timelines of the EU’s, the world has changed significantly since CBAM was first proposed. There is dramatic turbulence on global trade, with economic nationalism, shifting alliances and business uncertainties. In such a setting, adding new trade-related churn—however well-intentioned—requires especial sensitivity and prudence. There is a delicate balance to strike: encouraging climate ambition without creating unintended friction in trade or geopolitics. Further, realpolitik might persuade the Europeans to perform that most European of manoeuvres, the “stop-the-clock”, where an initiative like CBAM isn’t cancelled but slowed down for the foreseeable future. It’s not clear which way this will move, but there is a distinct dampening of the volume about CBAM from European leaders. In the strategic push for free trade agreements, it is fully conceivable that CBAM is kicked down the road for now, at least.

Possibly the most controversial aspect of the EU’s CBAM is that revenues collected by it will be deployed at the discretion of the EU – which is perfectly legitimate from the EU’s perspective but has fueled the characterization of CBAM as a new form of green colonialism. Exporting countries ask, justifiably, if a product is taxed for its carbon content, shouldn’t the country of origin have a say in how those funds are used, especially if the goal is to support decarbonization? There is an opportunity here. Countries like India should build effective carbon markets, which India is already doing with the proposed Carbon Credit Trading Scheme (CCTS). But this is a journey. Building effective carbon markets takes time, trust, and technical readiness. In the interim, transitional tools like export-oriented carbon fees—paired with robust consultation and safeguards—can help bridge the gap. Such mechanisms would not only retain revenues locally but could also fund the transition to low-carbon manufacturing at home. Over time, as carbon markets mature, these can evolve into more integrated and internationally accepted approaches.  

The world would be wise to enthusiastically coalesce around one guiding light: the more we can resolve through policy, cooperation, and good design, the less we’ll leave to lawyers at the World Trade Organization. That’s surely a win for everyone.

Hisham Mundol, Chief Advisor, India to Environmental Defense Fund

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