The EU is exporting carbon pricing through trade
Maximilian Fuchs and Camille Reverdy are Affiliate Fellows at Bruegel
Can trade policy drive global climate action? Early signs of the impact of the European Union’s carbon border adjustment mechanism (CBAM) suggest it can. However, this evidence also raises important questions about the diffusion of climate policy.
CBAM was introduced to prevent so-called carbon leakage – the transfer of emissions across borders via the relocation of production to countries with less-stringent climate rules. It applies a carbon price to EU imports of emissions-intensive goods.
From the outset, CBAM has raised concerns about whether it is truly a climate instrument or a form of green ‘protectionist measure’. Trading partners, particularly developing countries, worry that it might impose disproportionate economic burdens and restrict market access, rather than fostering a cooperative approach to global climate governance.
CBAM may thus mark the beginning of a new phase in global climate governance, in which access to major markets becomes a key driver of decarbonisation
In principle, however, by charging foreign producers for the carbon content of their exports while permitting rebates on carbon prices paid domestically, CBAM creates a powerful incentive for governments to introduce their own carbon pricing systems. This would allow them to retain revenues domestically rather than transferring them to the EU, highlighting that EU climate policy has the potential to shape policy choices beyond its borders.
This mechanism appears to be working. Our new research shows that countries more exposed to CBAM, meaning those exporting a larger share of CBAM-affected goods to the EU, are significantly more likely to have adopted carbon pricing policies since the EU first announced the measure in 2019.
This points to a broader transformation in how climate policy spreads internationally. Rather than being driven solely by multilateral agreements (ie. the Paris Agreement) or by domestic environmental preferences, the adoption of carbon pricing is increasingly shaped by trade incentives.
This suggests that for countries with high CBAM exports to the EU, self-interest, rather than environmental commitment, can be a powerful driver of climate action. Our initial findings also have implications for ongoing debates about ‘climate clubs’ – groups of countries that coordinate carbon policy to encourage wider participation. CBAM looks like a unilateral version of such a club, as it creates de-facto incentives for trading partners to adopt similar carbon pricing schemes.
Its apparent initial success in prompting new climate policies outside the EU raises the question of whether other major economies should adopt similar mechanisms, potentially reinforcing positive dynamics, or whether doing so could fragment the global trading system between richer, regulation-compliant states and developing countries without the capacity to change their industrial processes to follow climate rules.
The policy spillover effects are indeed uneven. Higher-income countries are more likely to adopt new climate policies in response to CBAM, while lower-income countries have barely responded, likely reflecting limited administrative and fiscal capacity.
A two-speed global transition is underway, in which richer economies can align more rapidly with carbon pricing norms while poorer countries lag behind. If trade-based mechanisms are to support a fair global transition, they will need to be complemented by support for lower-income countries, including technical assistance and capacity building.
With CBAM implemented, it is time for the policy debate to move beyond whether such tools should exist towards how they can be designed to balance environmental effectiveness, economic fairness and compatibility with global trade rules. CBAM may thus mark the beginning of a new phase in global climate governance, in which access to major markets becomes a key driver of decarbonisation.
This article is based on a Bruegel First Glance.
