Understanding and assessing CBAM: vulnerability and impacts in the EU

The European Union (EU) has made significant progress in reducing CO2 emissions in recent decades, partly due to the implementation of the EU Emissions Trading System (EU ETS). However, the decline in emissions has not been matched by an equally substantial reduction in the continent's carbon footprint. In addition, some European companies, in order not to be subject to EU climate regulation, could have relocated production abroad, thus confirming the risk of the so-called carbon leakage. To remedy this problem, the EU has proposed a Carbon Border Adjustment Mechanism (CBAM), through which a carbon quasi-tariff, determined based on the embodied emissions of the good and priced according to EU ETS criteria, would be imposed on imports of non-EU products from specific sectors. The measure, scheduled to enter into force in 2026, is expected to be compatible with WTO regulation. It should limit carbon leakage effectively, indirectly support European competitiveness, and stimulate other jurisdictions to implement their own carbon markets. At the same time, it poses some critical issues regarding adherence to the Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) principle. Also, it has a possible negative socio-economic impact on vulnerable countries inside and outside the EU. At the European level, the 2021 European Commission's impact assessment and subsequent CBAM-covered goods trade data do not show a relevant CBAM negative effect on the European economy. However, the mechanism may hit the Mediterranean Member States and some in Eastern Europe the hardest. Considering this, the new Commission proposed to amend the CBAM with some revisions during the European Clean Industrial Deal presentation in February 2025. The revisions aim to support the European small, medium and large enterprises most exposed to CBAM, with the hope that this will not translate into a reduction in continental climate ambitions.