Summary
The EU’s Carbon Border Adjustment Mechanism (CBAM) represents a major shift, connecting global trade and environmental policies. CBAM is a key component of the EU climate strategy. It aims to address carbon leakage by applying an EU-equivalent carbon price on imports. European policymakers see it as a key enabler for decarbonisation, and a way to nudge other economies to adopt similar measures. However, developing countries view it as a unilaterally imposed measure that risks disrupting their industrialisation plans. This paper discusses the impact of CBAM on developing economies and suggests four response strategies — decarbonise, emulate, challenge and avoid.
In considering these four options, developing countries have limited leeway. To maintain the status quo they must ‘decarbonise’ and prepare their industries to meet CBAM requirements, ensuring compliance with new trade conditions while avoiding (if possible) internalising the penalties. As part of a ‘challenge’ response, they should engage diplomatically to advocate for adjustments that reflect their unique economic realities. Over the long term, however, the real challenge lies in reshaping their industrial and trade strategies to align with a decarbonising global – not just EU – economy, investing in green technologies, and positioning themselves for a more sustainable future. Developing country governments should also seek to transcend the fragmented, bilateral discussions and assert their own agenda on carbon pricing and carbon leakage. Rather than simply reacting to the terms set by wealthier nations, they need to shape the conversation around the specific challenges and opportunities of low-carbon, energy-intensive industries.
About the Author
Bruce Byiers is the associate director of ECDPM’s sustainable and inclusive economic development cluster. He is also a member of the management team.
Alfonso Medinilla is the head of ECDPM’s climate action and green transitionteam. He focuses on the geopolitics of the global green transition and renewable energy.