Can a carbon price set in Brussels change the cost of steel shipped from Jakarta? With EU carbon permits hovering around €74–76 per tonne in mid-June 2025, the answer is fast becoming yes. The EU’s Carbon Border Adjustment Mechanism (CBAM) already requires importers of steel, aluminium, cement, fertilisers, hydrogen and electricity to file quarterly emissions reports, and—from 1 January 2026—to buy CBAM certificates priced off the EU Emissions Trading System. Supporters hail the mechanism as a textbook Pigouvian fix for “carbon leakage”; critics—among them Russia, India and South Africa—call it a thinly veiled tariff and have threatened or begun WTO action.
At its core CBAM extends the EU carbon price to imported goods so that domestic producers, who will soon lose most free EU-ETS allowances, compete on equal terms with foreign rivals. In theory that preserves Europe’s climate incentive without handing market share to higher-emission producers abroad. Yet three big debates dominate lecture halls and trade ministries alike.
First, efficiency versus protection. Classical theory says taxing the externality where it occurs is best; a border charge is only a “second-best” patch if global carbon prices are uneven. Opponents argue CBAM blurs the line between correcting a market failure and sheltering EU industry because the levy is collected on the good itself, not directly on its emissions, and because exporters inside the EU still receive rebates during the phase-out of free allowances.
Second, equity between rich and poor. Developing exporters often have higher carbon intensity and less capacity to measure or cut it. With no credit for historic low emissions and limited access to green finance, countries such as India, Indonesia and Vietnam could face effective ad-valorem duties of 8-20 per cent on steel or fertiliser, eroding hard-won market share. South Africa’s trade ministry has already warned that CBAM “penalises the wrong economies”.
Third, legality and retaliation. Russia opened a WTO dispute in May 2025, alleging CBAM breaches national-treatment and most-favoured-nation rules; the EU immediately rejected Moscow’s request for consultations. Other large exporters are weighing similar moves, raising the risk of tit-for-tat levies that could undermine the very multilateral system Europe says it is defending.
Who gains if CBAM sticks? EU producers that have already invested in scrap-fed electric-arc furnaces or green hydrogen stand to capture domestic market share as dirtier imports pay a surcharge. Norway, Canada and the UK—economies that price carbon domestically—see much of that cost netted off against CBAM, giving their exporters a head start. By contrast, high-carbon exporters lacking a domestic price lose twice: they pay the full CBAM bill and still face decarbonisation costs at home. Modelling by several European central-bank teams suggests a 2-6 per cent export-revenue hit for Russia, India and parts of Southeast Asia, while EU GDP may edge up by roughly 0.1 per cent thanks to “reshored” output.
Global ripple effects are already visible. Canada and the UK have launched consultations on their own border-carbon schemes, and a bipartisan U.S. proposal would raise an estimated US $200 billion over its first decade. Together these initiatives could form a de-facto “climate club”, pushing reluctant countries toward carbon pricing—or pushing them out of high-value supply chains. Yet multiple, un-coordinated CBAMs also risk a spaghetti-bowl of rules that fragments trade.
What strategic responses make sense?
- Negotiate and seek support. The CBAM regulation mandates an EU impact study on least-developed countries and leaves the door open to recycle CBAM revenue into green-technology finance. Low-income exporters should press for technical assistance on measurement, reporting and verification (MRV) so compliance costs fall quickly. taxation-customs.ec.europa.eu
- Diversify markets and upgrade products. Redirect some output to regions that either price carbon more leniently or reward low-carbon credentials—while moving up the value chain from raw materials to finished or branded goods.
- Decarbonise aggressively. Invest in renewables, energy-efficiency retrofits and cleaner processes (e.g., direct-reduced-iron with green hydrogen). Firms can lock in lower future CBAM bills by striking long-term renewable-power purchase agreements or hedging EU carbon permits forward.
- Form climate-finance coalitions. Regional development banks and multilateral funds can pool demand for green equipment, lowering costs and boosting bargaining power in technology transfer talks.
Conclusion
CBAM is either climate leadership or carbon mercantilism, depending on where you sit—but there is no doubting its power to shift incentives. Economic theory explains why the EU wants a border charge; history warns that poorly designed protection often hurts the poorest most. If developing exporters rely on litigation alone, they will likely lose time and market share. If they pair hard-nosed diplomacy with rapid emissions accounting and targeted green investment, CBAM could act less as a wall and more as a signpost toward higher-value, lower-carbon growth. The window to choose—before real money changes hands in 2026—is closing fast.