As the world scrambles to tackle climate change, the EU has forged ahead with a bold and controversial move: a carbon border adjustment mechanism (CBAM). Set to reshape global trade dynamics, this climate deal is being celebrated as a significant step toward sustainability. However, recent litigation and disputes at the WTO have condemned the agreement as a massive blow to the economies of developing nations and a perilous path to global green protectionism.
CBAM, which is set to go into effect at the start of 2026 once it is confirmed by the European Council and European Parliament, is a tariff on carbon-intensive imported goods like cement, iron, steel, aluminum, fertilizers, electricity and hydrogen. Through these efforts, the EU pushes cleaner production abroad and a decrease in carbon leakage. The agreement effectively urges governments to step up their climate efforts or risk losing competitiveness in the market, making the EU the global leader in sustainability.
While the deal may seem like a step in the right direction, the developing world has expressed serious disapproval toward the tariff, arguing that the measure discriminates against poor nations that do not have the administrative capacity or climate regulations to comply with CBAM. For instance, India’s Finance Minister Nirmala Sitharaman denounced the tariff as “unilateral and arbitrary,” acting as a “trade barrier” to the fastest-growing economies. As a result, New Delhi notified the WTO of their plans to retaliate via a retaliatory tariff.
The EU’s largest exporters in sectors covered by CBAM include Russia, Turkey, Ukraine, Norway, Iceland, Switzerland, Egypt and Morocco. However, some of these countries, particularly the EU’s trading partners with developing economies such as Mauritania, Sierra Leone, Mozambique, Bhutan and Jamaica, lack the economic and geopolitical power to impose tariffs. The GDP of developing countries is expected to decline between 1.4% and 2.4% depending on the final Greenhouse gas (GHG) price. As a result, their response will likely take the form of legal disputes at the WTO.
Furthermore, CBAM can be viewed as a message to major economies and significant GHG emitters of the EU’s commitment to safeguard its domestic priorities. Zhao, Deputy Minister of China’s Ministry of Ecology and Environment, claimed China staunchly opposed any unilateral measures that increased costs. “China always respects multilateral practices,” he added. This perspective also anticipates retaliatory responses, such as potential trade conflicts.
Researchers at the Swedish Institute for European Studies have expressed that expanding BRICS coalition could act as a counterbalance to the EU, potentially competing to shape the future global economic and trade landscape. Green protectionism can force countries to join cooperative partnerships that could reverse decarbonization efforts by encouraging less environmentally aligned economic interests. Consequently, addressing the geopolitical and geoeconomic challenges posed by the CBAM will be a crucial task for the EU.
While impending trade disputes and wars pose a significant threat to the multilateral trade regime, the pressing urgency of the climate crisis makes it vital to not abandon the CBAM. Rather, the EU must ensure it accommodates the economic needs of developing nations to foster a less discriminatory and effective approach to global trade.
The EU should adopt a carbon-pricing mechanism that goes beyond a direct carbon tax. It should include both explicit prices and other indirect measures that impact the cost of emitting GHGs, like taxes on fuel or cuts to fossil fuel subsidies. In short, it counts all the costs that make carbon-emitting activities more expensive, even if those costs aren’t labeled specifically as carbon fees. For many developing countries, direct carbon taxes or emissions trading systems are challenging to implement because they require significant resources, infrastructure and administrative capacity. However, virtually every country already has policies that indirectly discourage emissions, like fuel taxes or energy efficiency standards. It would also encourage a gradual transition so developing nations could build up their climate policies without facing immediate trade penalties. Reforms that reduce subsidies to fossil fuel consumption have taken place in many developing countries, such as Ghana and Sudan.
Lastly, the EU’s current CBAM doesn’t qualify as a “border carbon adjustment” according to the WTO because it violates articles II, III, XI and XIII of the General Agreement on Tariffs and Trade (GATT). A border carbon adjustment (BCA) that includes explicit and indirect measures is compatible with WTO law because it is not a unilateral action. According to the 2015 Paris Agreement, BCA mechanisms designed to allow for more leeway in climate policy should be seen as “multilateral universalism”. Thus, policies of this nature should face less stringent scrutiny under WTO rules as the GHG pricing mechanisms being introduced have been implicitly accepted by WTO members. This is evident from their collective endorsement of international climate agreements such as the 2015 Paris Agreement and the 2021 Glasgow Climate Pact. Even nations like China are likely to be supportive.
Thus, the EU must implement a fair and bold carbon border tax now. Absent a WTO-compliant BCA, Daniel Esty, a leading expert on climate change governance, warns, “I can imagine a scenario whereby they’re challenged not once or twice, but a dozen, 15, 20, 30, 40 times within the first six months.” Such legal uncertainties could also escalate into a global trade war, threatening economic stability and international cooperation on climate action. For the EU, this moment calls for decisive action to lead by example and pave the way for a sustainable and equitable global trading system.