While nations ramp up efforts to achieve net-zero emissions, new trade policies are emerging to align global commerce with climate goals. Among them, Carbon Border Adjustment Mechanisms (CBAMs), such as the EU’s pioneering CBAM, act as carbon tariffs on imported goods, aiming to prevent “carbon leakage” as well as encourage cleaner production across the globe. However, these mechanisms are reshaping global trade landscapes, presenting both risks of protectionism and opportunities to drive green innovation, especially for exporters in developing regions. Understanding the implications of these carbon border taxes is critical for navigating the evolving net-zero trade environment.
What are Carbon Border Adjustment Mechanisms (CBAMs) and why do they matter?
CBAMs are trade policies imposing charges on imports based on their embedded carbon emissions. They seek to level the playing field where domestic industries face stricter carbon pricing, ensuring that imported products bear the environmental cost of their production. Key features include:
- Pricing carbon emissions at borders to discourage importing high carbon footprint products
- Incentivizing exporters to decarbonize their supply chains to maintain market access
- Safeguarding domestic manufacturing competitiveness without jeopardising climate ambitions
By embedding climate costs into trade, CBAMs seek to align economic incentives with global emission reduction targets, however they also impact international relations and economic equity.
How are CBAMs reshaping global trade and impacting exporters?
- Risk of trade tensions: Developing countries that are dependent on carbon-intensive exports may face increased costs, potentially triggering disputes over green protectionism.
- Supply chain shifts: Exporters are compelled to adopt cleaner technologies or face higher tariffs, accelerating industrial transitions but raising capital challenges.
- Market access and competitiveness: CBAM-compliant exporters can gain preferential access and reputational benefits in nuanced, carbon-conscious markets.
- Fund generation for climate action: Revenue raised through CBAMs can be used to finance domestic climate initiatives in importing countries, though this may raise questions about fairness and sovereignty.
For example:
The EU’s CBAM, effective from 2023, levies carbon costs on imports of cement, steel, aluminium, fertilizers, and electricity, a sign of the potential expansion to other sectors as the mechanism matures. Meanwhile, African and Asian export-dependent countries are seeking ways to align with these requirements through technology transfer and capacity-building initiatives.
What opportunities and strategies can exporters in developing regions pursue?
- Prioritising investment in clean energy and low-carbon production methods to meet CBAM requirements
- Leveraging international climate finance and technology alliances for emissions reductions and infrastructure improvements
- Engaging actively in policy dialogues in order to shape equitable CBAM regulations and avoid unwanted barriers
- Diversification of markets and supply chains to reduce dependency on carbon-taxed exports
- Regional collaboration to foster unified responses and share innovations for sustainable trade
How can Strategy&Ops assist with navigating the net-zero trade landscape?
- Analyzing CBAM impacts on supply chains and export portfolios to identify vulnerabilities and opportunities
- Creating strategic roadmaps for emissions reduction aligned with international carbon pricing policies
- Facilitating multi-stakeholder collaboration among governments, businesses, and financiers for greater capacity building
- Supporting compliance systems and carbon accounting frameworks tailored to exporter realities
- Advising on trade policy engagement and advocacy to promote just, inclusive climate-trade strategies
Carbon border taxes are more than new tariffs; they represent a paradigm shift in aligning trade with climate justice and sustainability. For organisations and governments aiming to harness these emerging trade policies for enduring competitive advantage, contact Strategy&Ops at info@strategyandops.net to co-create pragmatic, forward-thinking net-zero trade strategies.
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References
Brookings Institution (n.d.) What is a Carbon Border Adjustment Mechanism? Available at: https://www.brookings.edu/articles/what-is-a-carbon-border-adjustment-mechanism/
Council on Foreign Relations (n.d.) What Is a Carbon Border Adjustment Mechanism? Available at: https://education.cfr.org/learn/reading/carbon-border-adjustment-mechanism
KPMG (n.d.) EU Carbon Border Adjustment Mechanism (CBAM): A new era of global trade. Available at: https://kpmg.com/xx/en/our-insights/esg/carbon-border-adjustment-mechanism-cbam.html
Offset8 Capital (n.d.) CBAM: Guide to the EU’s Carbon Border Adjustment Mechanism. Available at: https://offset8capital.com/articles/cbam-guide-to-the-eus-carbon-border-adjustment-mechanism/
OPIS (n.d.) CBAM 101: The EU’s Carbon Border Adjustment Mechanism—and its Changes—Explained. Available at: https://www.opis.com/blog/cbam-101/
PwC (n.d.) Carbon Border Adjustment Mechanism (CBAM). Available at: https://www.pwc.com/gx/en/issues/esg/carbon-border-adjustment-mechanism.html
Taxation and Customs Union, European Commission (n.d.) Carbon Border Adjustment Mechanism. Available at: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en