With the EU’s Carbon Border Adjustment Mechanism (CBAM) entering implementation on 1 January, we have entered a new era in how global trade accounts for carbon.
For decades, European companies could offshore emissions while keeping profits onshore. Now, the EU is signalling that those days are ending- and the rest of the world is watching closely, because CBAM doesn’t just reshape European climate policy; it has the potential to reshape how countries regulate industry, structure trade, and compete in global markets.
CBAM was created to tackle carbon leakage, effectively closing the loophole of European manufacturers relocating production to countries with weaker climate regulation to avoid paying carbon costs at home. Under this new system, importers must report and pay for the emissions embedded in products such as steel, cement, aluminium, fertilisers, electricity and hydrogen. It sits alongside the EU Emissions Trading System (ETS), sharing the broader objective of ensuring imported goods face a carbon cost comparable to what EU companies already pay. Together, these policies aim to correct the long-standing market failure that treated carbon as an externality rather than a production cost- a failure that has encouraged high-emissions industrial expansion and undercut climate-aligned practices across global supply chains.
As the mechanism becomes fully operational, it begins to act as a global policy signal rather than simply an administrative compliance exercise. Now, exporting countries will face a dilemma: pay the levy at the EU border, or develop their own emissions trading systems at home. If they choose the first, they absorb ongoing financial penalties that erode the competitiveness of their exports. If they develop their own, they embed climate pricing domestically and accelerate decarbonisation at the source. On balance, we might see a growing wave of carbon pricing reforms worldwide, as governments decide it is better to capture carbon revenues internally than surrender them at EU borders.
In fact, we’re already seeing early signs of a response. China has expanded its national ETS, accepting that higher short-term compliance costs may support long-term industrial upgrading and energy transition, while countries such as the UK and Canada are exploring similar approaches, partly to maintain trade access and partly to reinforce their own climate policy credibility. Companies appear to be putting more effort into building product-level emissions accounting, working with suppliers on verified data, and investing in lower-carbon materials and processes. All of this is a consequence of carbon moving from a compliance issue to a financial and strategic one. In practice, it looks like CBAM is accelerating a transition that both countries and businesses had delayed or tried to ignore: treating carbon exposure as a core competitiveness issue.
Critics, however, argue that CBAM restricts trade and unfairly favours European producers. Some warn it may increase costs for emerging-market exporters or strain diplomatic relationships- concerns reflected in analyses by the OECD and WTO, as well as position papers from affected industries, which highlight potential price increases and trade friction in sectors like steel and fertilisers. Conscious of these concerns, a key feature of the policy is that countries can avoid the levy entirely by introducing equivalent domestic carbon-pricing measures. This, in theory, hopes to balance the economic burden of compliance against the broader incentive to decarbonise production, leading to cleaner industrial development without permanently disadvantaging exporters. Overall, CBAM was designed as an incentive system rather than a protectionist barrier, one that rewards cleaner production everywhere, not just inside Europe.
In the end, CBAM might well be a once-in-a-decade catalyst for transformation of low-carbon trading. To capitalise on this opportunity, governments should accelerate carbon-pricing adoption, and businesses should map emissions across their value chains, upgrade reporting systems, and prioritise low-carbon innovation. Those who move early will secure a long-term competitive edge, much like the firms that embraced renewable energy and digital automation ahead of their peers during previous industrial transitions.
What began as a European climate policy may become a turning point in how the global economy values emissions. As CBAM goes live, the real question is how many countries and companies choose to reshape their own carbon strategies in response. If it works, we may yet see the next chapter of global trade where low-carbon manufacturing is the new baseline.
About the author:
Shachar Hatan is a climate and carbon markets specialist with experience in policy and corporate climate strategy.
