Rethinking the EU's Carbon Border Adjustment Mechanism: What it means for low-income countries

The European Union's Carbon Border Adjustment Mechanism (CBAM) represents a major climate and trade policy shift. It levies carbon pricing on carbon-intensive imported goods and provides a credit for carbon prices paid in the home market. Concerns have been raised about the potentially negative effects of CBAM on low-income countries, but new research using detailed plant-level data and a quantitative trade model suggests these effects are not inevitable:

• Emissions intensity of production is not systematically higher in low-income countries. Many producers in low-income countries operate at a smaller scale and use cleaner electricity sources, increasing their competitiveness under CBAM. Clean foreign firms could benefit from higher prices in the European market, creating a new margin of comparative advantage.
• CBAM creates a fiscal opportunity. Governments can impose their own carbon taxes on export sectors, raising revenue without opposition as firms pay the carbon tax either way. A domestic carbon price means revenues stay home rather than flowing to the EU.

CBAM presents both risks and opportunities for low-income countries. The key is proactive engagement: By recognising the new margins of comparative advantage that emerge in an increasingly carbon-priced world and considering options for domestic carbon pricing, countries can turn a perceived threat into an opportunity to develop sustainably and increase fiscal resilience.