In the context of the European Union’s Carbon Border Adjustment Mechanism (CBAM) imposing a levy on imported products based on the difference between the EU emissions trading scheme (ETS) carbon price and the carbon price paid in producing countries from 2026, governments outside the EU are attempting to understand how this impacts their exports and how to mitigate negative effects.
To help low- and middleincome countries (LMICs) with this process, LMIC governments, researchers, and policy experts are being brought together as an informal Community of Practice. Although the CBAM poses challenges for exporters, some green producers may develop a competitive advantage through the policy.
- Ministries of Finance, especially in LMICs, do not have clear models or information on how the EU CBAM and other carbon pricing mechanisms will affect their economies.
- An informal Community of Practice comprised of LMIC governments, researchers, and policy experts is being built by Kimberly Clausing (UCLA) and Catherine Wolfram (MIT) in collaboration with the African Tax Institute, the Climate Action Platform for Africa, and J-PAL, to help LMICs prepare for the upcoming EU CBAM.
- The EU CBAM has generated renewed interest in domestic carbon pricing, owing to its potential to reduce tariff exposure and to support domestic resource mobilization and the green transition. More generally, the EU CBAM provides incentives to spur decarbonization in impacted industries, whether via carbon pricing or otherwise.
- Countries designing CBAMs should consider incorporating measures that limit their potential negative effects on low-income countries.
MoFs should take three key steps to prepare for the EU’s and other potential CBAMs. First, they should analyze exposure to oncoming tariffs using models that incorporate general equilibrium effects (e.g., price changes in commodities regulated by the CBAM), the potential for market shifting, and relative competitiveness under a CBAM. Second, they should model the benefits and costs of policy responses (e.g., greening industry, domestic carbon pricing). Third, MoFs (in particular, those in countries with greener production or a greener energy mix) should build domestic carbon monitoring and reporting systems to avoid being assigned a default carbon intensity.
Keywords
analytical toolscapacity buildingcarbon pricingCBAMinternational context
