Tackling climate change is the defining coordination challenge of our time. Yet rising global geoeconomic fragmentation and dwindling support for the multilateral system have turned managing the global commons, including the Earth’s atmosphere, into a seemingly intractable problem. As noted by Pisani-Ferry et al. (2025), the current conditions herald, at best, an era of global action without global governance.

In 2015, the Paris Agreement established a shared objective: to limit the increase in global mean temperature by 2100 to 1.5°C relative to pre-industrial levels. But taking stock of the difficulty of committing individual countries to binding emissions reductions, it left them free to determine their contributions to that shared objective and define the means to achieve these. This flexibility to tailor commitments to local technological and political contexts facilitated the agreement and spurred policy developments around the world, but it opened the door to significant differences in ambition and policy stringency across countries.

In the absence of effective instruments to shield their economy from the adverse effects of asymmetric policy, more ambitious countries face a trade-off between their climate ambition and the competitiveness of emissions-intensive industries. In addition, without such safeguards, stringent unilateral climate policy may induce carbon leakage, i.e. the relocation of economic activity – and emissions – to foreign countries with laxer rules, which undermines global emissions reductions (Young 2022). Hemmerlé et al. (2026) show that while climate policy stringency has increased in recent years, progress has been highly uneven across countries.

To date, most jurisdictions have tried to protect these sectors through relatively simple tools such as exemptions from carbon pricing, free allocation of emissions allowances, output-based rebates and direct compensation schemes. These measures reduce apparent competitiveness and leakage risks but have been increasingly criticised for weakening the carbon price signal, distorting incentives to decarbonise, and limiting fiscal revenues.

The EU’s response has been to shift away from such mechanisms and toward a border-based approach, namely, the Carbon Border Adjustment Mechanism (CBAM), which entered its definitive phase last January.

CBAM design: Sense and sensibility

The EU CBAM imposes a charge based on the carbon content of certain imported products. Its primary goal is to create a level playing field between EU firms and foreign competitors in the EU market, particularly those operating in countries without comparable carbon pricing mechanisms.

Launched in October 2023 as part of the EU’s “FIT for 55” package, the CBAM currently applies to sectors such as cement, steel, aluminium, fertilizers, electricity, hydrogen, and certain intermediate products. Together, these sectors account for approximately 50% of emissions covered under the EU Emissions Trading System (EU ETS), with plans to extend the CBAM to all EU ETS-covered sectors in the future. Starting in January 2026, importers are required to purchase CBAM certificates equivalent to embedded emissions of imported goods. The CBAM charge paid by importers is a combination of the price of certificates and reductions applied to account for carbon pricing in the exporting country.

The CBAM has faced considerable resistance, both outside and inside the EU. Outside the EU, strong opposition has been expressed by China, India, Russia, and various developing countries exporting to the EU, on the grounds that it acts as a de facto trade barrier that raises costs for exporters to the EU, distorts international trade, and contradicts the principle of common but differentiated responsibilities enshrined in the United Nations Framework Convention on Climate Change (UNFCCC).

Inside the EU, some member states and CBAM-covered sectors have voiced concerns that it does not provide adequate protection to firms subject to the EU ETS, it leaves mid- and downstream sectors facing higher input prices, and it provides inadequate support to export-oriented firms facing foreign competition in third countries.

Domestic industries’ concerns are primarily related to the progressive phase-out, for CBAM-covered sectors, of the free allocation of emission allowances in the EU ETS. As of this year, firms in CBAM sectors will see annual reductions in the volume of free emission allowances they receive according to the schedule in Figure 1. These reductions are in addition to the planned reduction in free allowance volumes resulting from updates to the EU ETS benchmark values, as part of the tightened ETS rules for 2024–2030.

Given these sensitivities, quantifying who is directly affected – and by how much – is crucial for an evidence‑based policy debate.

Figure 1 Timeline for CBAM phase-in and ETS free allocation phase-out

Source: European Commission.

Measuring the trade impacts from the CBAM

In a recent paper (Dolphin and Ferrucci 2026), we develop a simple analytical framework to quantify the direct trade cost implications of the EU CBAM. For each exporting partner and product, we calculate the implied CBAM carbon fee, expressed as an ad valorem tariff equivalent – that is, as if the CBAM were an extra percentage tariff on EU imports and countries’ exports to the EU. Calculations are based on 2021 sector‑level input‑output tables and sectoral (scope 1) carbon intensity data.

The analysis is intentionally partial equilibrium. It assumes current trade patterns continue, without modelling how exporters or importers may adjust quantities, re‑route trade, or change production technologies in response to the CBAM. It ignores potential knock‑on effects on downstream industries within the EU that use CBAM‑covered goods as inputs. It also does not endogenise the impact of the CBAM on the EU ETS carbon price, even though the CBAM is expected to influence the price of emission allowances by affecting production and emissions levels. As such, the estimates are best interpreted as the upper‑bound, near‑term, first‑round effects of applying the full CBAM levy to today’s trade structure.

Low average impact, concentrated burdens

Our analysis suggests that, at current scope and carbon prices, CBAM costs are manageable even for the countries that will be most affected by its full implementation, with the CBAM triggering adjustments but no major disruption in trade flows. Across the EU and its trading partners, we find that the aggregate direct cost impact of the current CBAM is limited, ranging from 0.025% of the value of total imports in Austria to 0.35% in Croatia (Figure 2, left panel). On average, the CBAM would add approximately 0.1% to the value of EU imports. For non‑EU trading partners, the CBAM translates into an average additional cost of about 0.04% of their exports to the EU, with a maximum impact of 1.2% for the most exposed country (Figure 2, right panel).

Figure 2 Trade-weighted costs

Notes: Right panel, exporters ranked by largest value of CBAM cost. First twenty exporters shown. Iceland, Liechtenstein, Norway and Switzerland are not reported in the chart as they are exempted from CBAM. Data for Montenegro, which would likely appear in this chart, are unavailable.
Sources: Global Resource Input-Output Assessment (GLORIA) and Dolphin and Ferrucci (2026).

However, the aggregate picture hides important concentration of costs. Cement, iron and steel and aluminium stand out as sectors where CBAM‑induced costs can be sizeable, particularly for exporters with high emissions intensity (see Figure 3). For some individual countries heavily specialised in these CBAM‑covered products, the implied ad valorem equivalent can reach levels that are politically and commercially meaningful, even if their economy‑wide average remains small. This concentration helps explain why the CBAM has attracted strong political reactions from a subset of countries, despite the average effect remaining modest relative to the total value of these countries’ exports.

For EU policymakers, the concentration of costs implies that a small group of trading partners is likely to be disproportionately affected. Phased implementation, as currently planned, together with transparent communication, can help ease tensions with trade partners. In addition, targeted climate‑finance and technical‑assistance initiatives could support low‑income exporters in their decarbonisation efforts.

Figure 3 Exports to EU countries (percent of country’s export value by sector)

Notes: The box plots present the 90th percentile of the complete sample of exporting countries to the EU (14-122 observations, depending on the sector). The truncation of the distribution is implemented for visual clarity of the chart. For electricity, the sample only includes countries trading electricity with the EU.
Sources: Global Resource Input-Output Assessment (GLORIA) and Dolphin and Ferrucci (2026).

Conclusions

The EU’s Carbon Border Adjustment Mechanism is a sign of the times. Faced with insufficient global cooperation on climate change mitigation and determined to deliver its contribution to the Paris Agreement, the EU had little choice but to introduce such an instrument. While the current evidence suggests limited aggregate trade disruption as the CBAM is progressively phased in, the mechanism has broader strategic implications. It can support global decarbonisation by limiting leakage and nudging other regions towards explicit carbon pricing. But if perceived as unilateral or protectionist, it could undermine multilateral cooperation, especially with developing countries that emphasise equity and differentiated responsibilities. Future CBAM reform – covering scope, the treatment of export rebates, and alignment with WTO rules – will determine how strongly the mechanism incentivises foreign jurisdictions to adopt carbon pricing, whether it mitigates or exacerbates concerns about fairness and unequal historical responsibility and how stable the mechanism will be in the face of trade disputes.

Authors’ note: The views expressed here are those of the authors and do not necessarily reflect the official views or policies of the institutions with which the authors are affiliated.

References

Bellora, C and L Fontagné (2022), “The EU in search of a WTO-compatible Carbon Border Adjustment Mechanism”, VoxEU.org, 26 March.

Dechezleprêtre, A, A Haramboure, C Kögel, G Lalanne, and N Yamano (2025), “Carbon Border Adjustments: The potential effects of the EU CBAM along the supply chain”, OECD Science, Technology and Industry Working Papers No. 2025/02.

Dolphin, G and G Ferrucci (2026), “The EU’s CBAM: implications for member states and trading partners”, ECB Working Paper No. 3177.

Fontagné, L and K Schubert (2023), “The Economics of Border Carbon Adjustment: Rationale and Impacts of Compensating for Carbon at the Border”, Annual Review of Economics 15: 389-424.

Hemmerlé, Y, T Kruse and M Pisu (2026), “Beyond carbon pricing: How different climate policies affect carbon leakage through trade”, VoxEU.org, 2 February.

Pisani-Ferry, J, B Weder di Mauro and J Zettelmeyer (eds) (2025), Global Action Without Global Governance: Building coalitions for climate transition and nature restoration, Paris Report 3, CEPR Press.

Young, M (2022), “Improving carbon border adjustment mechanisms”, VoxEU.org, 22 August.