CBAM's Impact on Global Trade Structures

The Carbon Border Adjustment Mechanism (CBAM) is designed to address carbon leakage by imposing a carbon price on imports of certain goods from countries with less stringent climate policies. Its implementation significantly impacts global trade structures by reshaping supply chains, influencing competitiveness, and encouraging greener production practices worldwide. Exporters to regions adopting CBAM, primarily the EU, must account for their carbon emissions, which can increase costs for producers in countries with lax environmental regulations. This may lead to trade diversion, as importers seek lower-carbon or CBAM-exempt suppliers, potentially disadvantaging developing economies reliant on carbon-intensive exports. Moreover, CBAM incentivizes exporting countries to strengthen their climate policies and invest in cleaner technologies to maintain market access. While promoting environmental objectives, CBAM also raises concerns about compliance with World Trade Organization (WTO) rules and the risk of protectionism. Overall, CBAM is a transformative policy tool that not only advances climate goals but also drives the evolution of global trade by integrating environmental considerations into economic decision-making and encouraging a shift towards sustainable industrial practices.