Europe's push to cut greenhouse gas emissions by 55% by 2030 is prompting a major overhaul of its climate policies. Central to this transformation is the “Fit for 55” package, which reinforces the environmental ambition of the EU carbon market (EU Emissions Trading System, or EU ETS for short) and introduces the world's first carbon border adjustment mechanism (CBAM) — a levy on emissions embedded in imported products. While the EU CBAM aims to level the playing field in the common market between European manufacturers and foreign producers who face lower carbon prices, its effects will extend beyond the industries it initially targets.
Europe's double push: stronger carbon pricing and a new border mechanism
The EU is tightening its carbon market, making it more expensive for companies to emit greenhouse gases. Under the revised EU ETS, the overall cap on emissions of companies subject to the EU ETS will go down faster than before, raising carbon prices for EU producers. Simultaneously, free emission quotas that energy-intensive industries exposed to international competition have received for years will be phased out, meaning these industries will start paying more for their carbon emissions. These higher carbon costs risk driving production—and therefore emissions—overseas, undermining the EU's economic competitiveness and global efforts to reduce carbon emissions.
To tackle this risk, the EU has introduced the CBAM, which requires EU importers to purchase “CBAM certificates” reflecting the carbon embedded. Initially, CBAM covers a list of 303 energy-intensive products (iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen). Together, these products account for about 3% of EU imports.
Does the CBAM stop carbon leakage?
Carbon leakage occurs when stricter climate policies in one region push emissions-intensive production—and related emissions—to regions with less stringent environmental policies.
A recent OECD Working Paper uses the OECD Inter-Country Input-Output tables and other data to analyse the impact of implementing the EU ETS reforms, with and without CBAM:
Without CBAM, for every ton of CO₂ emissions avoided within the EU (due to the tighter EU ETS), approximately 0.19 tons of emissions would “leak” overseas. When accounting for these emissions increases outside the EU, the EU ETS reform would lead to a reduction in global emissions of 0.39%.
With CBAM, the leakage figure would not only drop but be reversed. This is because EU importers would shift sourcing to cleaner producers, often in countries with existing carbon pricing or lower emission intensities. As a result, global emissions would decline more—by 0.54%.
The ripple effects through the value chain in the EU
While CBAM focuses on 303 carbon-intensive goods, its impacts can be felt across multiple sectors:
CBAM-covered EU industries: Removing free quotas and reducing the cap on total emissions under the EU ETS negatively affects EU producers in these covered sectors, reducing their value added by about 1.06%. The CBAM partially offsets this loss to 0.85%, notably because it improves the competitiveness of EU producers in the domestic market but leaves them at a disadvantage in export markets.
Downstream sectors: EU industries that rely on inputs from CBAM-covered sectors will face higher input costs and will not receive comparable border protection on their products. As a result, these non-covered sectors that generate 95% of the EU value added will see their competitiveness reduced in both domestic and export markets following the introduction of the CBAM. On average, downstream sectors’ value added is expected to decrease by -0.014%, with sectors such as Electrical equipment and Machinery being more severely impacted.
Aggregate effects: When looking at the entire EU economy, the GDP effect of the EU ETS reforms remains identical with or without the CBAM (-0.29% of GDP), as losses in downstream sectors balance the gains in covered industries.
Most EU trade partners gain from the EU ETS reform combined with the CBAM
Beyond EU borders, the impact of CBAM depends mainly on a country’s trade exposure to the EU and the carbon intensity of its exports:
Overall patterns: Most non-EU economies see slightly positive or neutral effects (0% to 0.5%) following the combined implementation of the two policies
Countries with cleaner production: economies like Chile, Mexico and Türkiye, which have relatively low carbon emission intensity of production in CBAM sectors, stand to gain modestly as EU importers shift away from more carbon-intensive sources.
High-Emission producers: countries such as South Africa and India, where CBAM-covered production is more carbon-intensive, could experience small negative effects from reduced exports (~-0.20%).
Key considerations for CBAM’s future and implementation
While the EU is eyeing an expansion of CBAM to more products by 2030, the OECD’s research suggests this might not pack much additional punch. Adding 1,400 more products would only marginally reduce global emissions (-0.02%), indicating the current scope already targets the most crucial sources of carbon leakage. However, the impact of an expansion will vary across products, depending on their carbon intensity, trade exposure, downstream usage and ability to measure emissions embedded in complex goods.
The immediate challenge lies in accurately measuring and verifying emissions from imports. Many trading partners will need to upgrade their emissions accounting to meet EU standards. There's also the risk of creative compliance – countries shipping their cleanest products to Europe while consuming higher-emission goods at home – which would diminish the policy’s effectiveness in reducing global emissions.
Looking further ahead, success depends on how businesses and countries adapt. Companies that can invest in cleaner technologies will gain a competitive edge, while those that can’t might struggle. The policy also creates a strong incentive for other countries to adopt carbon pricing and collect the revenue themselves rather than paying it at the EU border. Other jurisdictions (including the UK, Canada, and Australia) are already exploring similar border measures.
Conclusion
The EU’s Carbon Border Adjustment Mechanism is a first-of-its-kind policy. While our analysis indicates it can be effective in reducing carbon leakage, the policy’s ripple effects and implementation require thoughtful monitoring. As other regions consider adopting their own versions of CBAM, the EU’s example offers proof of concept and a cautionary tale about the potential unintended consequences. Balancing ambitious climate targets with economic competitiveness will remain a global challenge for policymakers. As data on CBAM-covered products becomes available, the OECD will continue to analyse the impacts of this novel policy instrument.
To read more about OECD analysis of the CBAM, download our policy brief on the topic or read the recent working paper on Carbon Border Adjustments: The potential effects of the EU CBAM along the supply chain.
