Assessing the gaps in CBAM and the EU’s net-zero strategy

Domestic challenges faced by CBAM

The EU CBAM is expected to cover approximately 5% of the bloc’s imports and its overall macroeconomic impact on Europe is projected to stay small. The European Commission estimated a contraction of EU GDP by 0.22% by 2030 due to CBAM, which is lower than under a baseline scenario without CBAM but with continued free allocation of ETS allowances. But significant sectoral impacts remain, with a projected reduction in EU imports between 4% for aluminum and 26% for fertilizers. Some countries, namely Bulgaria, Ireland, and Greece are the most likely to be economically affected by the deployment of CBAM due to their high reliance on imports for CBAM-covered goods. 

One of the main challenges for CBAM declarants is accurately accounting for specific embedded emissions in imported goods. This involves complex calculations based on production processes and precursor material emissions, which must be reflected in CBAM certificates. The EU Commission has restricted the use of default emissions data, requiring declarants to use actual data from suppliers, which can be challenging, especially for complex goods or when sub-suppliers struggle to communicate relevant data. 

Additionally, small- and medium-sized enterprises (SMEs) globally are particularly vulnerable to the complexities of CBAM. They are likely to face increased costs associated with navigating various national regulatory environments, submitting declarations, or providing adequate data to the importer. They are also more vulnerable to supply chain disruptions, especially if they operate under just-in-time models. The EU has proposed simplifications to reduce the administrative burden on SMEs by increasing the de minimis threshold for importers, potentially exempting 90% of businesses from CBAM reporting. 

The involvement of national competent authorities (NCAs) across all 27 EU members adds another layer of complexity. These authorities handle registration of CBAM declarants, but their diverse structures and practices may lead to a lack of harmonized standards, further complicating the system for importers and exporters. This could create serious competitiveness issues as the cost of administrative compliance rises with the number of different sets of national systems to follow. 

Impact on low- and middle-income countries

Two categories can be used to assess the economic impact of CBAM on third countries: 1) its impact on the overall value of exports to the EU, and 2) the economic importance of these goods for exporting countries. China faces high CBAM duties as the largest exporter to the EU, while countries like Türkiye, the UK, India, and South Korea have the capacity to adapt through domestic carbon pricing systems or investing in industrial decarbonization. Vietnam relies heavily on exports to the EU but not in CBAM sectors, limiting the impact. 

The second category includes LMICs where CBAM could significantly affect their economies due to their vulnerabilities. Countries like Zimbabwe, Ukraine, Georgia, India, and Belarus are at considerable risk. More recent analysis focused on Africa found that the continent might be the most negatively affected by CBAM due to high ad valorem rates on African exports. The projected loss of income across the continent is estimated to reach up to 0.5% due to a decrease in exports from Africa to the EU of up to 5.72%. That said, some of these African exports may also be diverted to other markets, such as China and India, thus limiting the loss in economic or social terms. 

Overall, it remains challenging to ascertain the specific impact of CBAM on LMICs, as it will strongly depend on the reactions of impacted partners, with potential for either trade diversion and/or value chains adaptation. In the long term, the real challenge for LMICs will be to reshape and align their industrial, investment, and trade relations beyond the EU so that they can benefit from value chains integration into a decarbonized global economy. 

Interoperability of carbon pricing systems

By March 2025, there were 58 ETS globally: 36 active, 14 under development, and eight under consideration. This is double the number from six years ago. The EU benefits from first-mover advantage as many countries may be incentivized to seek some degree of alignment with CBAM as an important destination market. Ideally, carbon pricing systems should cover the largest share of emissions with the fewest entities involved, even as they vary in scope and ambition. South Korea and California currently have efficient systems, covering 88.5% and 75% of emissions, respectively. The UK covers fewer emissions but impacts more entities than the EU system.  

Despite gaining momentum across the world, carbon pricing systems lack convergence and interoperability. Differences persist in sector coverage and ETS auction prices, driving up compliance costs. Some countries, such as Brazil, have called on CBAM to extend beyond recognition of carbon price only and consider other carbon reporting standards aligned with international guidelines. The recent implementation of widespread tariffs by the US, including 25% tariffs on CBAM sectors such as steel and aluminum, are also likely to further disrupt and thereby challenge the efforts toward interoperability of carbon pricing systems across the world. 

In addition to improving system interoperability to reduce business costs, using CBAM revenues to mitigate its negative impact makes sense. The CBAM regulation aims to support EU climate activities through national revenues from auctioning emission permits. However, third countries have received little consideration on the matter despite several calls in the EU to mobilize CBAM revenues to increase the EU’s contribution in international climate finance, in particular to support LMICs on the decarbonization of their manufacturing industries. A potential way forward is to expand the CBAM definition of a carbon pricing system to include green investments in the exporting country. 

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