This report examines the EU Carbon Border Adjustment Mechanism (CBAM) as a climate instrument applied at the border. CBAM operates on the basis of import declarations submitted to authorities at the border, emissions reporting, and certificate surrender, and therefore it is simultaneously aclimate measure, an economic policy instrument, and a trade intervention. As the report shows, CBAM will affect import prices, competitive conditions in the EU internal market, and the economic prospects of trading partners. CBAM should therefore be understood as a governance innovation at the climate-trade interface rather than a standalone policy tool.
The report emphasises that CBAM is the first global attempt to implement a border carbon adjustment at scale, and that it has been designed to reconcile multiple objectives: preventing leakage risk, levelling the playing field, preserving ETS integrity, enabling the phase-out of free allocations, incentivising third-country decarbonisation, generating revenue, and improving transparency of embedded emissions. The report argues that such a multi-purpose mechanism inevitably involves trade-offs. For this reason, it structures the analysis around distinct dimensions: trade, development, administrative governance, revenue, and long-term “end-game” dynamics, and in each area identifies the main opportunities, challenges and risks associated with CBAM’s evolving design.
CBAM entered its definitive phase on 1 January 2026, following the transitional reporting period that began in October 2023. The report therefore highlights that CBAM’s operation, while conceptually simple in design, is administratively demanding in practice. Importers must manage extensive monitoring, reporting, and verification (MRV) obligations, registry processes, and data collection from third-country producers (including for certain precursors), supported by accredited verification. The report stresses that these features are essential for environmental integrity but generate fixed compliance costs that may fall disproportionately on the EU’s small companies and on exporters from countries with limited institutional capacity. This administrative dimension is therefore not secondary: it is central to CBAM’s credibility, enforceability, and legitimacy.
From a trade perspective, the report shows that CBAM will influence prices and sourcing decisions. It can shift EU imports toward lower-emission production and raise the cost of carbon-intensive basic materials, with downstream effects for manufacturing, construction, and agriculture. At the same time, the report discusses risks of downstream leakage, where EU producers face higher input costs while imported finished goods remain outside CBAM scope. It also explores how trade diversion, resource shuffling, and circumvention pressures can change the emissions profile of EU imports without necessarily reducing global emissions. The report further recognises that CBAM remains defendable but vulnerable under WTO rules, despite careful design choices intended to maximise legal admissibility, and that political controversy often turns on perceived unilateralism and standardsetting as much as on technical legal arguments.
An important contribution of the report is its analysis of the developmental implications of CBAM. Because the mechanism does not systematically differentiate by income level, it does not follow the EU’s established trade-anddevelopment approach with equity principles reflected in climate diplomacy. The report explains that for many least developed countries and lower middle income countries, CBAM may operate less as a decarbonisation incentive and more as a market-access constraint, especially in basic materials that are often associated with early industrialisation. Where capital, technology, clean electricity and MRV capacity are constrained, adjustment may take the form of lower export prices, reduced volumes, or export diversion to markets without comparable border carbon costs, producing carbon diversion rather than global mitigation.
The report also provides a cautious assessment of CBAM as a source of revenue. While CBAM may generate substantial receipts through certificates acquisition and surrender, revenues are structurally uncertain because they depend on ETS prices, trade volumes, emissions intensity, and behavioural responses by exporters and governments. The report underlines that CBAM revenues are ultimately borne by EU consumers through price pass-through, and it discusses the political sensitivity around revenue use. While proposals were made to recycle revenues toward climate transition support in developing countries, the report notes that the adopted framework channels
receipts largely into the EU budget, raising questions of the perception of CBAM in external relations.
Looking ahead, the report stresses that the EU is a first mover, but likely not the only actor. Several jurisdictions, including the United Kingdom, Canada and others, are considering their own border carbon measures. A future of multiple CBAM-type instruments would increase the importance of cooperation on emissions accounting, mutual recognition, origin rules, and anti-circumvention frameworks. As the report argues, this could create opportunities for convergence, but also challenges of duplication and fragmentation, and risks of intensified trade tensions and regulatory conflict.
Overall, the report concludes that CBAM is a high-stakes experiment in aligning trade with deep decarbonisation. Its primary role is to preserve the integrity and credibility of EU climate ambition, particularly as free allocations are phased out, by limiting the trade channel through which decarbonisation could be displaced. At the same time, the report underlines that CBAM remains an evolving instrument, and that further refinement should remain guided by a clear principle: maximising climate effectiveness in the EU and globally, while minimising avoidable economic harm and disproportionate burdens, especially for small and medium sized enterprises and less developed partners. Readers are encouraged to engage with the full report, which provides a dimension-by-dimension assessment of CBAM’s opportunities, challenges and risks, and proposes areas where design improvements and complementary measures remain possible.
About this series
“European Union Climate and Energy” is a section with a series of reports and other publications designed to provide insight into the EU’s ambitions in the field of climate and energy policy development. Each publication in this series focuses on the EU’s global engagement in a clean transition or on how partner countries’ climate and energy ambitions relate to the EU. This series aims to provide a comprehensive understanding of the EU’s engagement strategies in the field of sustainable energy cooperation, climate change adaptation and mitigation as well as its partnership policies in the field of climate and energy.
Nicole Linsenbold
