Europe Trades Global Green Transition for Green Protectionism

As global efforts to reduce carbon emissions intensify, policies are emerging that balance environmental goals with trade practices. One such policy is the world’s first carbon border adjustment mechanism (CBAM) enacted by the European Union (EU). While addressing domestic emissions, these policies also examine the carbon footprint of imported goods. However, these initiatives could potentially infringe upon climate justice, disproportionately affecting nations in the Global South.

Instituted by the EU, CBAM imposes a tariff on imported items produced through carbon-intensive means. This tariff aligns with the EU’s existing internal carbon regulations, which put a price on carbon emissions. The introduction of this carbon tax in 2026 has sparked debates over equity in climate justice, with critics voicing fears of the economic impact on developing nations.

Dissecting the Carbon Border Adjustment Mechanism

Functioning alongside the EU Emissions Trading System (EU ETS), a type of cap and trade system operating within the EU, CBAM focuses on certain high-emitting sectors such as cement, aluminium, fertilisers, iron and steel, hydrogen, and electricity. The EU ETS sets a cap on allowable carbon emissions, requiring emitters to purchase allowances to cover their emissions. With CBAM, importers into the EU must buy CBAM certificates priced at EU ETS allowances, effectively imposing the EU’s emission cost standards on non-EU countries.

Designed to address carbon leakage – emissions directed towards countries with less stringent environmental regulations to avoid costs associated with domestic emission reduction efforts -, CBAM serves the EU’s climate goals. As a result, it has also been seen as a means to protect the competitiveness of industries within the EU. This aspect has drawn scrutiny, with critics describing CBAM as a protectionist policy that negatively affects exporting countries, particularly those in the Global South.

The Impact on Developing Nations

For countries exporting to the EU, CBAM presents a difficult choice: either reduce emissions during production or face dire economic repercussions. Unfortunately, the implementation of CBAM doesn’t consider the differing capacities of countries to achieve emission reductions, thereby penalising countries lacking the financial resources to quickly transition to lower-emission infrastructure.

Transitioning to low-emission technology comes with significant infrastructure costs, a challenge for developing countries. In addition, access to sustainable technologies is often hindered by costly licensing and patents. Moreover, smaller firms face the threat of complex logistical issues such as calculating and reporting emissions, which are particularly challenging for poorer countries. While wealthier and less affluent nations alike may grapple with enforcing these measures, the financial burden is exponentially greater for poorer countries.

Although CBAM encourages exporting countries to strengthen their domestic carbon markets to avoid fees upon reaching the EU, this system disadvantages countries with weaker or non-existent systems. Under the stipulation of CBAM, carbon pricing paid before importation can be deducted. Consequently, countries like China with robust emissions trading systems can potentially reduce losses by 30-60%.

The Unfulfilled Promises of the Global North

Ironically, developed countries, which include EU member states, have failed to meet their commitments to climate finance under the Copenhagen Accord. This funding could have eased the financial burden of transitioning to green technologies for developing countries. Despite agreeing to provide $100 billion annually to support developing nations in battling climate change by 2020, this commitment remains largely unfulfilled.

The imposition of a tariff under the banner of climate justice is not only discriminatory but also hypocritical. Despite a 2022 report by the OECD claiming that the $100 billion goal was reached, donor countries faced criticism for offering loans instead of grants. This approach risks trapping developing nations in debt, thereby undermining the sustainable transition to green technologies.

Opponents of CBAM argue that it goes against Article 3.5 of the UNFCCC, which discourages climate initiatives that serve as hidden restrictions on international trade. Following accusations that CBAM breaches WTO rules against discriminatory practices, the EU has faced both informal challenges and formal disputes at the WTO.

Lessons for the United States

The EU’s CBAM has set a precedent for green protectionism, casting a shadow on global green transition efforts. This approach, which combines protectionist trade policy with climate action, has caught the attention of other countries, including the United States. However, the replication of this model in the United States could be a mistake, given the potential for perpetuating economic inequalities and undermining equity in climate justice.