Carbon border tax adjustment - The Sustainability Management Wiki

Authors: Malin Brumme, Melanie Kortland, Jannes Ehrhardt
Edited by: –
Last updated: October 9, 2025

Executive summary

Carbon border tax adjustments (CBTAs) aim to limit carbon leakage that occurs when production shifts to jurisdictions with weaker climate policies. By aligning the carbon cost of imports (and, in some designs, exports) with domestic carbon prices, CBTAs seek to preserve the integrity of emissions pricing, safeguard competitiveness for emissions‑efficient producers, and incentivize cleaner production globally.

Carbon leakage can arise through three main channels: competitiveness effects that reallocate output across regions, long‑run investment shifts that add capacity in low‑regulation locations, and energy‑market effects when lower global fossil prices stimulate demand elsewhere. Technology spillovers can work in the opposite direction by diffusing cleaner processes and reducing leakage.

The literature distinguishes three CBTA families: import charges, export rebates, and full border adjustments that combine both. Modeling studies generally find that well‑designed full adjustments are most effective at addressing leakage and mitigating output losses in energy‑intensive, trade‑exposed sectors, though precise outcomes depend on scope (direct emissions only or including electricity‑related emissions) and whether tariffs reflect firm‑specific intensities or average values.

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is the most advanced real‑world example. It entered into force in 2023 with a transitional reporting phase (through 2025) and is planned to apply financial adjustments from 2026. Initially covering basic materials (such as steel, cement, aluminum, fertilizers, electricity, and hydrogen), CBAM complements the EU Emissions Trading System and phases out free allocation over time.

For organizations, the immediate implications are operational. Importers need governance, data, and controls to calculate embedded emissions, engage suppliers for primary data, choose defensible methodologies, and integrate reporting into existing compliance processes. Building centralized carbon data systems, improving supply‑chain transparency, and adopting digital tools can reduce risk and cost while revealing decarbonization opportunities.

CBTAs also raise challenges. Narrow coverage can disadvantage downstream manufacturers, and ‘reshuffling’ may redirect cleaner output to regulated markets without reducing global emissions. Administrative burden, verification capacity, treatment of carbon prices paid abroad, and equity impacts on developing countries require careful design. Legal compatibility with trade rules and the political risk of retaliation must be managed.

Practitioners should monitor scope expansion, verification rules, and interactions with domestic carbon pricing and free‑allocation reforms. Proactive steps include mapping exposure, building supplier engagement programs, piloting product‑level carbon accounting (including electricity‑related emissions), and embedding CBAM‑ready controls into procurement and customs processes.

1 Definition and relevance

The reduction of GHG emissions, especially carbon emissions, has been identified as an essential requirement for combating climate change and limiting global warming.¹ In order to fulfill the obligations imposed by international agreements such as the Paris Agreement, many countries have implemented unilateral policies aimed at reducing national GHG emissions.² Carbon pricing mechanisms, such as carbon taxes or ETSs, have been particularly widely promoted as instruments to ensure the achievement of targeted emission levels in the most cost-effective manner. Furthermore, these policies are generally preferred by economists since they are able to internalize the costs of pollution from GHG emissions into the price system, thereby providing market signals to consumers and suppliers of emission-intensive goods.³ In recent years, these policies have seen an increasing uptake particularly but not exclusively in developed and industrialized countries. However, the share of global emissions covered by the aforementioned carbon pricing schemes remains relatively low at around 23% with strong variations across regions and countries. Differences can also be observed in the level of carbon prices charged under the different policy regimes, leading to an uneven playing field for companies at the global level.⁴

1.1 The relevance of carbon leakage

The above-mentioned differences between unilateral carbon pricing policies across countries result in a phenomenon widely discussed in the empirical literature and political context as carbon leakage. Görlach and Zelljadt (2018, p. 13) refer to different approaches used in the literature to define the term and summarize that “carbon leakage means that part of the emission reduction achieved through climate policies is offset by an emission increase somewhere else (in another country or in another sector).”⁵ The scientific literature identifies three main channels through which carbon leakage can occur. First, carbon prices affect domestic suppliers targeted by the policy, particularly those producing carbon-intensive goods, by raising their production costs. This leads to a competitive disadvantage compared to producers subject to lower or no carbon pricing regimes and results in higher quantities produced in regions or sectors with less stringent regulations. While in this case the reallocation of production activities only occurs among already existing facilities, the second channel refers to the establishment of new capacities in regions or sectors with lower or no carbon pricing in the long run. Lower competitiveness of domestic firms, resulting from the above mentioned production channel, leads to decreasing returns on investment making it less profitable to invest in production facilities in markets subject to stricter regulations. Therefore, investments are redirected towards regions or sectors with less ambitious climate policies where hence higher production capacities and consequently higher production volumes and emissions can be observed. The third channel affects the resource markets. Higher carbon prices lead to increased prices for fossil fuels and result in reduced demand for these commodities. If the reaction on the demand side is strong enough and the supply of fossil fuels remains unchanged, the global fossil fuel price will decline and lead to a higher demand and increasing emissions in countries with less stringent climate policies.⁵ These three channels are also illustrated in Figure 1. A fourth and less discussed channel of carbon leakage deals with technology spillovers, which result in negative leakage rates. In this context, carbon pricing regimes are generally assumed to induce innovation and the development of new and less carbon-intensive technologies thereby improving the competitiveness of companies subject to carbon pricing and reducing carbon leakage.⁶ These innovations might also spill-over to third countries and further enhance emission reductions abroad.⁷

Figure 1: Channels of carbon leakage and their effects on domestic and foreign economies, own illustration

The extent to which overall carbon emissions increase due to geographical or sectoral shifts of production activities depends on several factors specific to the respective markets or sectors. The two main aspects influencing the leakage rate, as identified in the literature, are the carbon intensities and exposure to trade. While carbon intensities define the financial burden imposed by carbon pricing policies, trade exposure can serve as an indicator for competition among firms. The latter can, together with the demand elasticities, significantly affect the degree to which companies can pass on the costs incurred by the policy. As shown above, carbon leakage is generally considered to have a negative effect on the outcome of climate policies. This can be explained by its potential to reduce the effectiveness of unilateral policies. Emission reductions achieved as a result of more stringent regulations in one region or sector are offset by increases elsewhere, rather than being actually abated, leading to a situation in which the overall effect on global emissions is significantly reduced. Furthermore, it is suggested that carbon leakage impairs the efficiency of global climate change mitigation efforts.⁵ Considering that carbon pricing regimes might increase production costs in the short run and affect investment decisions in the long run, the competitiveness of domestic companies is a central aspect of the political discussion. Especially the production and investment channels through which carbon leakage might occur are considered problematic and are targeted by additional policies.⁶

1.2 Carbon border tax adjustments in theory and practice

In recent years, economists and politicians have searched for an adequate instrument to address carbon leakage and its direct and indirect consequences as presented above. In this context, different policy instruments and designs have been analyzed. Consequently, a broad strand of literature has emerged on so-called ’Carbon Border Tax Adjustments’ or ’Border Carbon Adjustments’ as integrated measures to already existing carbon pricing policies. CBTAs constitute levies imposed on imports produced by foreign suppliers or rebates applied to exports of domestic companies adjusting for differences in unilateral carbon prices. In some cases, both approaches can be combined.⁶ Therefore, the special feature of this policy instrument is that it can address not only domestic but also foreign firms and provide an “effective extension of the carbon pricing regime to entities outside the implementing jurisdiction” (Ward et al., 2015, p. 41)⁸. However, some concerns are addressed in connection with CBTAs. First, tariffs imposed on emissions embodied in foreign products might be considered by trade partners affected by CBTAs as a measure to protect domestic industries and could lead to the implementation of countermeasures, potentially leading to trade disputes among countries. Second, there is a risk of non-conformity with WTO trade rules, which could act as a possible legal barrier for the implementation of CBTA policies.⁹¹⁰ Both aspects will be discussed in more detail in Section 4. Finally, potential negative effects on downstream industries, the problem of ’reshuffling of emissions’ and the unequal distribution of the burden imposed by the policy between developed and developing countries are of particular concern when it comes to the implementation of CBTAs.¹⁰¹¹ These topics will be presented in Section 2.

Figure 2: Timeline: Introduction of the CBAM regulation, own illustration

So far, this mechanism has been mostly analyzed and discussed based on theoretical considera- tions due to the rare real-world cases in which such an instrument was actually implemented.⁶ However, the topic gained more practical relevance when the EU presented the ’Fit-for-55 pack- age’ in July 2021 announcing the implementation of a ’Carbon Border Adjustment Mechanism’ along with other actions aimed at ensuring the achievement of the EU’s climate change mitigation targets.¹² The Council of the EU reached an agreement on a general design of the policy in March 2022.¹³ Subsequently, the draft for the regulation was acknowledged by the European Parliament and the Council of the EU in December of the same year.¹⁴ The regulation for the EU CBAM entered into force in May 2023. The policy begins with a transitional phase covering the period from October 2023 until December 2025 during which the obligation of importing companies falling under the CBAM is limited to reporting requirements. This will be extended under the definitive regime starting in January 2026, when the levies on the embodied carbon contents will actually be charged.¹⁵ A timeline of the implementation process of the EU CBAM is provided in Figure 2.

Through the CBAM, the EU aims to strengthen the price signal of its domestic carbon pricing policies, such as the EU ETS, and to address carbon leakage. Furthermore, the policy should incentivize firms to invest in more sustainable technologies, thereby contributing to a further reduction of GHG emissions and achieving the EU’s emission targets. The EU perceives that such impulses will not be limited to EU domestic companies but will also spill-over to entities in third countries and hence fostering emission reductions abroad as well. The free allocation of emission allowances under the EU ETS, which has been used by the EU so far to address carbon leakage, shall be gradually phased out with the implementation of the EU CBAM.¹⁵

2 Background

The idea of controlling for differences in the national efforts undertaken to mitigate climate change, especially the reduction of carbon emissions, was already discussed in 1996 by Hoel, who argued in favor of import and export adjustments as a complement to uniform carbon taxes.¹⁶ Throughout the subsequent years, CBTAs have been extensively discussed and analyzed in the empirical literature. A primary focus in the debate on CBTAs has been on so-called EITE industries, which are particularly energy-intensive and exposed to international trade increasing the risk of carbon leakage in these sectors.⁹¹⁷ Since CBTAs have not been widely adopted in practice, most economic studies analyzing the impact of CBTAs use assumptions, estimates, and theoretical models, which are then applied to and fed with data.¹¹ The ability to conduct direct comparisons of these studies is limited by differences in the aggregation level of data, underlying models, and by variations in the geographical regions considered. The discussion of CBTAs has brought about a wide range of proposals for policy designs, each connected with different strengths and weaknesses when it comes to the legal, economic, or environmental implications.

As mentioned in the previous section, the adjustments can apply to either imports or exports, or on both. Therefore, the literature mainly distinguishes between three main categories of CBTAs: import taxes, export rebates, and FBAs (terms adopted from Fischer and Fox, 2012).¹⁸

2.1 Main types of carbon border tax adjustments

Import taxes represent levies based on the carbon content of products that are imported from abroad as a complement to the domestic emission price. While this procedure adjusts for differences in carbon prices within the domestic market as shown in Figure 3, companies might still face competitive disadvantages with regard to exports to foreign countries. Therefore, it can be expected that the demand for domestic products might increase, while imports might decrease as a consequence of the price adjustments. Conversely, the increased production in the home market, might come at the cost of increased domestic emissions. Since this form of CBTAs focuses solely on imports, no quantitative effects on exports or on foreign demand can be anticipated.¹⁸

Figure 3: Effects of different CBTA designs, own illustration based on Dröge (2021, p. 8)¹⁹

Export rebates are price adjustments on products that are exported, based on the amount of the domestic carbon price paid, as illustrated in Figure 3. The main target of this form of CBTAs is to increase the competitiveness of domestic companies in foreign markets, while the full carbon price applies domestically. Therefore, export rebates might increase the quantities sold to foreign consumers and decrease their demand for goods produced abroad. Similar to the import taxes presented above, increased domestic production might lead to higher emissions in the country implementing the export rebate. Since the national carbon price still applies to products consumed domestically, export rebates are expected to have no quantitative effects on domestic demand and imports.¹⁸

FBAs constitute a combination of import taxes and export rebates. Consequently, FBAs could recover the competitiveness of domestic companies in the home as well as in foreign markets, while also probably leading to increased domestic emissions from higher production volumes.¹⁸

Table 1 illustrates how the policy design might affect bilateral trade flows and demand for domestic and foreign products. From an economic and political point of view, it is also of interest how different forms of CBTA perform with regard to reestablishing the competitiveness of domestic companies as well as promoting further emission reductions. A CGE analysis conducted by Fischer and Fox (2012) for the United States shows that FBA outperforms partial border adjustments for imports and exports in terms of competitiveness aspects, as measured by avoided losses in production and net exports, compared to a scenario with only a carbon tax and no CBTA in place, although the magnitude of the effects differs between sectors. In most sectors, FBAs were also found to be more effective in achieving additional emission reductions compared to export rebates and import taxes alone.¹⁸ An analysis conducted by Monjon and Quirion (2011a) for the EU, suggests that, in most model specifications, CBTAs are able to reduce carbon leakage more than other policies considered. The effect was found to be particularly strong for FBAs for which negative leakage rates were estimated for all policy and model specifications.²⁰ Comparing different analyses contributing to an Energy Modeling Forum study (EMF 29), Böhringer et al. (2012) find similar outcomes for the implementation of a FBA as presented above. FBAs were able to reduce carbon leakage across all studies considered while at the same time cutting emission reductions in the regulating country and reducing the increase of emissions in non-regulating countries. Furthermore, FBAs were found to mitigate some of the production losses of EITE industries in the respective countries. The output of EITE industries in non-regulating countries was found to be lower under a FBA policy.¹⁷

Table 1: Types of CBTAs and their expected effects, own illustration based on Fischer and Fox (2012)¹⁸

2.2 Further components of carbon border tax adjustment policies

While import taxes, export rebates and FBAs constitute the three broad categories of CBTAs, the policy proposals analyzed in the literature are further refined in terms of emission considered and the calculation of the tariff rates for the case of import taxes. Emissions are usually divided into three scopes: direct emissions (scope 1), indirect emissions from electricity (scope 2) and other indirect emissions (scope 3).²¹ Theoretically, emissions from all three scopes can be captured by a CBTA. However, concerns mainly in regards to practicability prevent all three scopes being part of the actual policy proposals discussed in the literature.¹¹¹⁹ Many empirical studies focus on two options in which either only direct or both, scope 1 and scope 2, emissions are included.¹⁷²⁰²² Böhringer et al. (2021) analyze empirical data for the years 2000 until 2014 for OECD and Non-OECD countries. They show that in the given period the relative share of Non-OECD EITE industries in overall emissions in Non-OECD countries has increased.²³ These insights might promote those arguing in favor of a CBTA implementation, since these sectors are most likely primarily targeted by such a policy. Nevertheless, they find that at the same time the direct emissions of EITE industries have decreased in relative and absolute terms in OECD and in Non-OECD countries probably making a CBTA addressing only direct emissions less effective.²³ The data also reveals that the importance of electricity generation has increased when it comes to the composition of overall emissions in Non-OECD countries potentially supporting the option to capture scope 2 emissions by a CBTA as well.²³ However, Böhringer et al. (2021) show that the share of Non-OECD EITE sectors in total electricity consumption has declined with Non-EITE sectors gaining more importance in this context which probably might also impair the effectiveness of CBTA policies including both, scope 1 and scope 2 emissions but addressing only EITE industries.²³

Several approaches are proposed for the calculation of the tariff rates associated with the implementation of import taxes which can be subdivided in two broad types: fixed values for importing entities and product-specific tariffs based on the actual embodied carbon content. Fixed values can be implemented in the form of average emission intensities calculated for a specific country, region or sector.¹⁷¹⁹²² The average values applied can either refer to the domestic or foreign carbon intensities.¹⁹ Those arguing in favor of using the actual emission embodied in products, claim that it increases the incentives of suppliers to reduce their own emissions since these abatements are directly related to lower tariff payments for exports to regions with a CBTA in place. This rationale is not limited to scope 1 but also considered to be valid for scope 2 emissions, as it is assumed that taxing actual electricity-related emissions might induce suppliers to buy green-energy certificates and thereby lowering their scope 2 emissions.²²

Böhringer et al. (2017) use a CGE model to analyze how the outcome of import taxes varies with different emission scopes considered and approaches used to calculate the tariff rate. For both dimensions, two options are considered and used in different combinations. As emission scopes, direct and indirect electricity-related emissions are considered, while the tariff rate is either calculated based on regional averages in the foreign country or the actual embodied carbon content. All forms of import taxes considered were able to reduce carbon leakage, while all scenarios using firm-targeted tariffs were able to reduce leakage rates more than their counterparts using average values. Similar findings are presented for emission reductions in EITE trade flows from unregulated to regulated regions indicating that goods with lower carbon intensities are imported to regions implementing a CBTA. All import taxes were also found to reduce EITE trade flows from unregulated regions as also suggested by Table 1. The import reductions were found to be lower for those policies using the companies’ actual emissions for either one or both emission scopes included. Their analysis also shows that the production losses of domestic EITE sectors are less pronounced with import taxes in place. The avoided reductions in production volumes are particularly large when both scope 1 and scope 2 emissions are charged based on firm-targeted tariffs.²²

2.3 Challenges associated with carbon border tax adjustments

CBTAs might also negatively affect downstream industries through increased costs for raw materials and other inputs captured by CBTAs.¹⁰ This might decrease their competitiveness in domestic as well as in foreign markets and could consequently induce a relocation of production activities in these sectors. A further extension of CBTAs to such products might constitute a possible solution to such unintended outcomes. Another critical aspect discussed in the literature is the issue of so-called ’reshuffling of emissions’ describing the phenomenon that only goods with low carbon contents are exported to regions regulated by means of CBTA policies while those products with high embodied carbon emissions are sold to countries without CBTAs in place possibly leading to redirection of trade flows among countries.¹¹²⁴²⁵ Similar findings are also presented by Böhringer et al. (2021) who estimated by means of a CGE analysis for the period between 2000 and 2014 that the carbon embodied in trade among Non-OECD countries increases once a carbon pricing policy is jointly implemented in OECD countries. A further increase can be observed in simulations using a scenario in which this carbon pricing scheme is complemented by an import tax.²³

Beyond environmental and competitiveness concerns, CBTAs are often criticized for shifting the burden of climate policies from industrialized to developing countries.¹⁷ In this context, it is usually assumed that developed countries are those implementing carbon pricing and CBTA policies. Böhringer et al. (2012; 2021) argue, that unilateral climate policies such as carbon pricing schemes have negative effects on the terms of trade of third countries which are even increased when these countries are subject to a CBTA. This is also shown by estimations of the Fisher-price-index for trade flows between OECD and Non-OECD countries under the scenario of a carbon tax and those with an additional border adjustment mechanism.¹⁷²³ The burden shifting effect can also be observed for estimations of the GDP in regulating and non-regulating countries for both scenarios. While both groups of countries face GDP losses in most of the studies analyzed by Böhringer et al. (2012), it can be observed that most of the simulations show a reduction of these losses for regulating countries and an increase in non-regulation regions once a CBTA is implemented.¹⁷ This underlines that countries might improve their economic situation by implementing a CBTA at the expense of countries without such regulations in place.¹⁷²³

3 Practical implementation

As the previous sections have hinted at, there is a large body of literature analyzing policy options when it comes to CBTAs, ranging from first to second best policies, cost efficient measures, equally distributed shares of the abatement burden policies, and more. however, there is way less scientific emphasis on foresighted guidance regarding affected firms. Understanding, adapting to, and utilizing the changing business environment is crucial for a successful long-term transition into a sustainable future. This section therefore aims at providing the reader with a comprehensive overview of urgent issues regarding the practical implementation of CBTAs into business as usual from a firms perspective. Note that in all that follows, it should be further distinguished from which point of view an agent is considering such issues. The main difference in motives and monetary incentives is caused by the affiliation of a firm. If the firm belongs to the coalition (or large open economy) that implements a CBTA policy (e.g. CBAM), the implications for actions to be taken differ from a firm in a non-coalition economy. Here, we mainly focus on agents inside a policy area, since the legal framework affects them directly and poses challenges to be overcome. however, there is also literature on strategic decision making processes of non-EU exporting firms. Huang, Liu and Zhao (2022) for example develop an evolutionary dynamic game of strategic interaction to model how agents from third countries, mainly Chinese firms, would best respond to the implementation of CBAM. Their main insight in that regard is that, especially in carbon intensive industries, cost and competitive pressure will rise significantly, making strategic adaptations such as investments in low-carbon technologies, data transparency and more efficient supply chains necessary.²⁶ Furthermore, every case should be considered separately by additional information about spatial and geopolitical circumstances, political frameworks, trade relations and more.¹ This wiki entry therefore can be seen as a starting point with general information for affected agents that need to take action, compulsory.

3.1 CBAM – Basics and requirements

With the European CBAM being the largest and most debated practical policy example of a CBTA, it provides a well-suited example of what such regulations demand from firms. The first practical challenge is imposed by the need to constantly keep informed on legal regulations and changes in reporting obligations.²⁷ This circumstance is not an unknown cost factor, especially for larger firms. The extensive regulatory body of CBAM and the complexity of global supply chains however are expected to cause additional layers of expenses to this cost factor. For every firm inside the EU buying intermediate products on international markets, Regulation (EU) 2023/95615 and Regulation (EU) 2023/177329 should be well examined by the legal department (if existent), as they provide details on definitions and how the CBAM should be implemented. Even if a firms product is currently not affected by CBAM, keeping up to date with policy development can prove important if amendments are to be made by the EU.

As the broad timeline in figure 2 shows, at the time this wiki entry is written, a transitional period with less strict regulations is in effect. During this phase only a limited scope of application is binding. For example, cars (which usually are products containing a large amount of steel) are non-affected goods, since they are not declared in Annex I of the Regulation (EU) 2023/956.¹⁵²⁸ Basic materials and primary products like iron, steel, aluminum, cement, fertilizers and electricity are currently the main targeted industries by CBAM.²⁹ Article 30 however clearly declares the possibility of broadening the scope of application and instructs the commission to consider such extensions.¹⁵²⁸ Furthermore, starting in the second half of the transitional phase in 2025, importers (or their chosen customs representatives) can start applying for CBAM permits.²⁸ To continue this starting guidance for affected firms, some of the vocabulary defined in Article III of the Regulation (EU) 2023/956 needs to be introduced. According to this, declarants are individuals or entities responsible for making declarations to customs authorities on behalf of an importer regarding goods being brought into the European Union. Under the CBAM, declarants must ensure accurate reporting of the CO2 emissions embedded in imported goods and any carbon price associated with those emissions. Customs representatives act on behalf of importers in fulfilling customs formalities, including those related to the CBAM. They can either act in a direct capacity (acting in the name and on behalf of the importer) or in an indirect capacity (acting in their own name but on behalf of the importer). They can be used by companies lacking the internal expertise to manage the complex requirements of customs procedures, including those specific to the CBAM. The existence of declarants and customs representatives can be justified by the ambition to streamline and professionalize this process and ensuring compliance with the manifold regulatory obligations. Importers are the entities bringing goods into the EU from non-EU countries, meaning the firms mainly addressed by this article.¹⁵²⁸ Declarants and customs representatives must be registered in the relevant national customs databases and the CBAM transitional registry, which is established by the European Commission.² Importers need to apply for registration under CBAM through the CBAM registry to submit quarterly emissions reports.²⁷²⁸

The first quarterly report was due at the end of January 2024, since it has to be submitted one month after the quarter has ended at the latest. Due to technical issues, the substantial amount ofinput such a report requires and the ambition of policy makers to foster acceptance and policy compliance among agents, penalty payments in the case of failure to report were not imposed in the beginning of the reporting phase.²⁸ Furthermore, the price of the penalty payment can vary according to case specific circumstances. If detailed evidence can be provided that the importer has taken all necessary steps to comply with the obligations, customs authorities have margin for generosity.²⁸ Articles 32 to 35 represent the relevant regulations for CBAM reporting. Article 35(2) defines the following mandatory contents of a CBAM report:¹⁵

The total quantity of each type of good, reported in megawatt-hours for electricity and in tonnes for other goods, categorized by the installations that produced the goods in the country of origin.
The actual total embedded emissions, expressed in tonnes of CO2-equivalent emissions per megawatt-hour of electricity or per tonne of each type of good, calculated according to the methodologies outlined in Regulation (EU) 2023/956 and Regulation (EU) 2023/1773.
The total indirect emissions, calculated in accordance with the implementing act (Regula- tion (EU) 2023/1773).
The carbon price paid in the country of origin for the embedded emissions associated with the imported goods, considering any available export rebates or other carbon prices.

Fulfilling the reporting requirements poses a major challenge for practitioners. As the transitional phase is currently running (see figure 2), there might be amendments to the definite regime beginning in 2026. In what follows a brief overview of the challenges and approaches is given.

3.2 Data and methodology

The complexity of this topic traces back to the difficulty in determining the complete embodied carbon content of a commodity. The academic literature maps these embodied emissions into three scopes: (1) direct emissions and CO2-equivalents from owned and controlled company sources, (2) indirect emissions embodied in all energy sources used by the firm and (3) all indirect emissions embodied in intermediate products (inputs).³⁰ The sum of these three scopes yields the carbon footprint of a product.³⁰ The economic literature has used CGE models, different policy scenarios and simulations to conclude that CBTAs addressing all three scopes of embodied carbon content is more cost efficient from a global welfare perspective in fighting climate change than only using scope 1 and/or scope 2²²³¹³², even though the extensive data and legal requirements prove to be more costly at the industry level.³⁰

In the case of the European CBAM, Annex IV distinguishes commodities between simple goods (goods that emit CO2 or other greenhouse gases only during their production process, without the need to account for embedded emissions from inputs or precursors) and complex goods (goods that are not simple goods).¹⁵ Especially the determination of embodied emissions of complex goods is demanding and requires data that is not in the possession of the importer. For producers from third countries outside the scope of CBAM who want to continue exporting to European importers, this means they need to develop and invest in the necessary monitoring and data infrastructure, if not existent already.²⁸ Creating an incentive to do so is part of the EU’s strategy to achieve progress in fighting climate change on a global level from the perspective of a large open economy. For importers the reporting obligations require to obtain data from their suppliers, who are not directly beholden by any regulation to make this data available. Especially in complex value chains where intermediate inputs have grey emissions itself, this iterative data seeking approach might not be feasible without simplifying assumptions or default values.²⁸ In anticipation of any potential penalties, an importer should be able to prove that they have tried their best to obtain the information from their suppliers or negotiate to incorporate corresponding agreements into trade treaties.²⁸ When it comes to complex goods, only indirect emissions of intermediate goods that are defined as important for the system boundaries of the production process are to be taken into account (Annex IV(3) – Regulation (EU) 2023/956).¹⁵ Annex IV(3) also refers to the exempted intermediate products being listed in the implementing act (Regulation (EU) 2023/1773) according to Article 7(7).¹⁵.

For practitioners it is also important to understand how direct and indirect emission should be calculated and which methodology is allowed. Since Article 4(3) of the implementing act only allowed different methodological approaches during the transitional phase until the end of July 2024, the third quarter of 2024 is the first reporting period in which the EU method needs to be used.²⁸ To ensure that their reports meet regulatory requirements, the most important equations for affected firms are equations 3.1 and 3.2, which cover the calculation of direct emissions from the production process and indirect emissions from intermediate goods (in the case of complex goods). Practitioners need to understand and apply this equation to correctly determine the emissions of their products and ensure that their reports meet regulatory requirements.

For simple goods, Annex IV No.³ of Regulation (EU) 2023/956 specifies the Specific Embedded Emissions of the goods, measured in CO2-equivalents per tonne (SEEg) as shown in equation 3.1:

SEEg = AttrEmg

ALg

(3.1)

In this manner, AttrEmg are total attributed emissions from the production process of the goods (sum of direct and indirect emissions) and ALg refers to the activity level, which is the quantity of goods produced during the reporting period (e.g. a tonne of steel).¹⁵³³ Note that having ALg in the denominator normalizes the amount of emissions and allows comparisons on per unit bases between different products. Furthermore, if a production process becomes more efficient this calculation allows controlling for proportionality, meaning that even though total emissions might increase, per unit emissions (SEEg) would decrease. The same intuition applies for complex goods:

SEEg = AttrEmg + EEInpMat

ALg

(3.2)

In equation 3.2 additional input materials with their own embedded emissions are also accounted for. EEInpMat represent the embedded emissions in the input materials (intermediate goods) used during production (Annex IV No. 3).¹⁵ Hence, in theory, SEEg captures the total carbon footprint of good g. Annex IV No.³ further defines EEInpMat as shown in equation 3.3:

EEInpMat = Σ Mi · SEEi (3.3)

i =1

Here, Mi is the quantity of the intermediate product i used in production and SEEi are the Specific Embedded Emissions of the intermediate product i. The value of SEEi should be determined by the amount of emissions occurring at the production sight (installation) of input

i .¹⁵ This leaves room for excluding some emissions that theoretically should be included when
the term total carbon footprint is mentioned. A further demarcation from theory and practical implementation, that the regulations acknowledge, are data limitations. Even in the case of full cooperation of exporting firms outside the EU, some data acquisition measures might be too costly or impossible to implement. When it comes to data at the installation level, Annex III A.3.1 of Regulation (EU) 2023/1773 declares the basic principle of always using the best available data source.³³ The implementing act specifies further requirements to the underlying data and the approaches to be used by practitioners. However, the body of regulations is to extensive to cover it in this wiki entry. Therefore, we now delve into some useful tools and strategies for practitioners.

3.3 Tools and strategies

As the previous section implied, the data acquisition process and reporting impose a main challenge when it comes to the implementation of the CBAM. From a long-term strategic sustainable management point of view, practitioners should interpret this policy as a foundation for revising their supply chains and minimizing the carbon footprint of their products, as well as improving downstream data availability by engaging with their suppliers.³⁴ Therefore, Solgaard (2023) argues that “Tax departments should take the opportunity to support these efforts by centralising and controlling the large amounts of data points and flows required to effectively manage the risk of non-compliance where these processes are otherwise decentralised and responsibilities are shared over different parts of the business”.³⁴ Especially with other countries considering forms of CBTAs (e.g. Australia), such a centralized framework might prove useful and minimize the burden of compliance.³⁴ Fostering the awareness of CO2 leakage among economic agents and pressing their efforts to reduce embodied emissions is another objective of the CBAM policy.

A best practice case study might guide other firms on how to approach these multifaceted challenges. Microsoft, for example, published a report that documents their efforts to reduce embodied emissions.³⁵ In their construction projects, such as the Puget Sound campus modernization, Microsoft utilized the Embodied Carbon in Construction Calculator (EC3)³ to track and reduce carbon emissions associated with building materials. By requiring environmental product declarations from suppliers and integrating these into their procurement processes, they reported a 30% reduction in embodied carbon compared to traditional methods.³⁵ This approach not only aligns with the CBAMs goals but also demonstrates some practical steps companies could take to centralize data management and foster greater transparency in their supply chains. This experience shows how leveraging digital tools and engaging closely with suppliers can effectively reduce the carbon footprint and prepare firms for the reporting requirements imposed by policies like CBAM.³⁵ Note that a motivational bias on Microsoft’s end cannot be ruled out when publishing their report and a tendency to highlight successes while downplaying or omitting challenges and shortcomings should be assumed. Nevertheless, specifically targeting scope 3 emissions (which are also highly targeted – but in a reduced form – by CBAM) could be viewed as a long-term strategic decision.

A further step that could be taken by firms who want to take early action and prepare for more demanding legal requirements in the future could be to invest in a carbon accounting software. To streamline the process, various carbon accounting software solutions have emerged that help businesses monitor, report, and reduce their carbon footprints. These tools offer robust data management capabilities and can assist in complying with policies like CBAM by ensuring relatively accurate tracking of emissions across supply chains.³⁶ In what follows we present five carbon accounting software providers, based on a comparison by the ABI Research platform.³⁷⁴

One prominent option is the German company Sphera, which has established itself as a leader in the industry, offering a comprehensive platform for carbon accounting and environmental, social, and governance performance management as well as LCA methods.⁵³⁷ It is described as having powerful and detailed carbon footprinting capabilities that can be applied at various organizational levels, from individual products to entire supply chains. Supporting firms with scope 3 emission reporting makes it a well-suited tool for companies across different industries. However, it is also described as being a more costly solution.³⁷
Another key player is Persefoni, known for its artificial intelligence driven approach to carbon accounting. Persefoni is described as being particularly strong in the financial sector, providing tools that facilitate detailed Scope 1, 2, and 3 emissions tracking. Its platform also can be integrated into financial reporting systems, making it a solid tool for large corporations that require precise and reliable carbon data for both sustainability and financial reporting. Utilizing machine learning models, large language models and super- and unsupervised clustering methods, it is strongly data driven and future oriented.³⁷
Watershed is another leading solution, specializing in comprehensive sustainability tools that help large enterprises manage their carbon footprints across complex supply chains. Watershed is designed to assist companies in not only tracking their emissions but also in implementing effective strategies to reduce them, aligning closely with the goals of CBAM. This tool mainly focuses on carbon footprints, carbon accounting, and sustainability.
IBM Environmental Intelligence Suite offers a powerful platform for large companies, integrating climate risk analytics with carbon accounting. IBM’s software is described as being particularly strong in handling big data with environmental context, making it suited for organizations that need to forecast future carbon emissions and adjust their strategies accordingly.³⁷
A last carbon accounting solution we present here is Sweep, which provides a modular, user-friendly carbon management platform that is gaining popularity in Europe. It is known for its flexibility and ease of integration, making it a suitable choice for companies looking to customize their carbon accounting processes to fit specific organizational needs.³⁷

These modern software solutions are (among others) some of market leaders when it comes to carbon accounting technology, offering the necessary tools for firms to manage their carbon emissions and comply with evolving regulatory standards like CBAM.³⁷ As hinted at before, the choice of the right tool is case dependent and should align with a companies corporate strategy. Bates et al. (2013), for example, have developed a model to integrate LCA with Building Information Modeling (BIM) software to allow for evaluating environmental impacts and CO2- equivalent emissions during the design process of a building.³⁸ For architectural projects this might prove especially useful, since strategic decisions based on embodied emissions can be made early on in the planing phase of a production process.³⁸ The effort to minimize the total carbon footprint in this industry is in line with the goals of policies like CBAM. Hence, when comparing different tools and software solutions for the transition into a sustainable future, we recommend to consider a long time horizon and analyze the industry specific characteristics carefully. When it comes to the long-term perspective, we now move on to potential drivers and barriers of CBTA policies, such as the CBAM.

4 Drivers and barriers

Having established the relevance (section 1), background (section 2), and practical implemen- tation (section 3) of CBAM, it is now essential to delve deeper into their specific drivers and barriers regarding sustainability. The following section will explore key areas such as the effectiveness of CBAM in mitigating carbon leakage in section 4.1, imports, and exports (section 4.2), and in section 4.3 the competitive dynamics it introduces. Additionally, we will examine the administrative burdens associated with CBAM in section 4.4 and the complex legal, political, and trade-related issues it raises in section 4.5.

4.1 Effectiveness of CBAM against carbon leakage

Carbon pricing has been recognized as the most effective strategy for reducing global carbon emissions.³⁹ As nations deepen their commitments under the Paris Agreement, the urgency to develop more effective methods to mitigate carbon leakage intensifies, with CBTAs emerging as a particularly promising solution.⁴⁰ Numerous studies (e.g. Monjon and Quiron (2011) and Böhringer et al. (2012)) have identified CBTA as the most effective mechanism for addressing carbon leakage4445, with free allocation only marginally reducing leakage, while border adjust- ments nearly eliminate it, especially when both imports and exports are included. The reduction in global emissions is notably greater when export adjustments are incorporated as indicated in a study by Monjon and Quiron (2011), which compared different scenarions of a CBTA.⁴¹ These results show that the implementation of a CBTA can therefore fundamentally be seen as a driver for sustainability.

The practical implementation of CBTA poses significant challenges, as elaborated in section 3, which could potentially be a barrier for sustainability since these challenges often lead to an increased cost expenditure and a further need for administration. Policymakers must navigate a complex array of regulatory decisions, including determining the scope of the CBTA, the methodology for assessing the carbon content of products, the type and pricing of the adjustment. Additionally, decisions regarding the allocation of resulting revenues carry significant economic and environmental implications and must be weighed alongside the nuanced technical, legal, and political consequences.³⁹

It is important to note that while CBTAs can reduce carbon leakage by about one-third (see e.g. Branger and Quiron (2014)⁴²), it cannot entirely eliminate it, primarily because it addresses only the competitiveness channel.³⁹ Mörsdorf (2022) suggests that the current proposals, including the European Commission’s CBAM, would reduce carbon leakage to a similar extent as the existing free allocation system.⁴³ However, Korpar et al. (2022) emphasize that despite its potential, the CBAM alone is insufficient to achieve significant climate protection, with its impact on global CO2 emissions varying depending on design features — from negligible reductions in cautious scenarios to a modest 0.34% in more ambitious ones.⁴⁴⁴⁵

The CBAM’s extensive scope affects a wide range of industrial and commercial companies, initially targeting high-emission products like electricity, cement, iron and steel, aluminum, fertilizers, and hydrogen. These sectors are prioritized due to their strong incentive for carbon leakage, which can be seen as a driver for sustainability since the carbon-intensive sectors are targeted first.⁴⁶ The requirement for CBAM reports to adhere to a uniform calculation method further strengthens the level playing field, especially given the low de minimis limit, which broadens the range of covered products.⁴⁷⁴⁸ By using a uniform method, the CBAM reports are comparable to each other, which makes CBAM even more a driver for sustainability.

While the CBAM creates incentives for third countries to adopt climate protection measures as already mentioned in section 1, the robustness of self-reported carbon data remains questionable.⁴⁴⁴⁶ The planned phase-in period for the CBAM, set to conclude in 2026, may be too short to phase out free allocation for EU producers gradually. Extending this test phase could help ease pressure on international supply chains and provide time for negotiating a global climate club with key European trading partners. Clear and transparent rules are needed for pric- ing import emissions, particularly regarding the conditions under which regions or low-emission products are exempted. The effectiveness of the CBAM in reducing carbon leakage should be rigorously evaluated during its introductory phase, with adjustments made as necessary to ensure it achieves its intended protective effect. If leakage increases, the CBAM alone may prove insufficient, potentially leading to counterproductive outcomes for climate policy.⁴⁹ Also evaluating the effectiveness of CBAM will be important because the results may imply policy changes, which firms need to adopt into their organization.

4.2 Effects on production, imports and exports

The introduction of a CBTA is likely to lead to a decrease in the European production of GHG-intensive products. This anticipated decline could negatively impact politically influential industrial sectors, posing a significant political challenge to the implementation of the border adjustment, which would be a barrier in the implementation process. However, from a cost- efficiency perspective, the reduction in GHG-intensive goods is necessary to facilitate their replacement with cleaner alternatives, which is crucial for achieving effective abatement and is on the other hand a potential driver for sustainability regarding the implementation of CBAM.⁴¹

The limited scope of the CBAM carries the risk of encouraging EU companies to shift the production of processed goods abroad. This is due to the competitive disadvantage created by the CO2 price paid by European producers or the CBAM applied to imported raw materials when competing with imported semi-finished or finished products.²⁹ Since CBAM only covers low- value-added products, it incentivizes companies to relocate entire production and manufacturing processes to third countries, allowing them to import finished goods that are not subject to CBAM.⁴⁸ If the policy does not accomplish a significant reduction of carbon leakage, this would clearly be a barrier for CBTAs to be implemented in the future.

For EU producers exporting their goods outside the EU, these cost disadvantages are similarly problematic. One way to mitigate this issue would be to expand the scope of CBAM to include more processed products or to introduce an export rebate. Garicano, for instance, proposes extending CBAM to all imported goods that contain basic materials covered by the EU ETS. However, expanding CBAM to more processed goods presents significant methodological challenges in measuring the CO2 content, which would impose a heavy administrative burden on importers. In the short to medium term (up to 2030), implementing such an extension is deemed unfeasible due to the lack of methodologies for accurately assessing the CO2 content of complex finished products.²⁹

4.3 Competitive advantage of lower-emission products for import

A significant concern among businesses is the impact of CBAM on their competitiveness. Approximately 60% of surveyed companies fear negative consequences due to CBAM, while only about 18% anticipate positive effects.⁵⁰ The mechanism is designed to incentivize the production of lower-emission products for import, as fewer CBAM certificates would need to be purchased for such products, giving them a competitive advantage through lower market prices. The goal is to ensure that domestically produced low-emission products are not disadvantaged by higher prices compared to imported goods.⁵¹

CBAM aims to price more carbon-intensive (and previously cheaper) products on par with less carbon-intensive domestically produced goods, thereby creating a level playing field and preventing disadvantages for environmentally friendly, but more expensive, products.⁴⁶ This ensures that all goods placed on the EU market are subject to the same carbon price. Producers would thus have two options: (i) pass the additional carbon costs on to consumers — who may then opt for less carbon-intensive or low-carbon alternatives — or (ii) invest in developing low-carbon production methods to reduce their exposure to carbon costs.⁴³

However, passing on higher prices is only feasible when there is sufficient demand and willing- ness to pay for carbon-intensive products, which in turn depends on market conditions and the intensity of competition. Political measures that incentivize reducing CO2 intensity throughout the supply chain could stimulate demand for such products. Public procurement could also play a role by giving greater weight to climate-friendly production in its tendering processes.⁴⁹

According to Fremerey et al. (2022), especially Germany faces a dual competition challenge: On one hand, the country competes with others that have similar climate protection regulations, where factors such as cost burdens, skill structures, and the availability of renewable energy are crucial. On the other hand, within Germany itself, there is competition between investments that are climate-friendly and those that are not, where the costs of emissions are lower due to lower prices. CBAM alone cannot adequately address these cost disparities, which leads to government measures (e.g. government infrastructure development, contracts for difference, and climate protection contracts) being needed, especially when investments in climate-neutral technologies are not economically viable.⁴⁹⁵²

4.4 Increased administrative expenses

The implementation of CBAM presents significant administrative challenges, particularly due to the complexity of monitoring and taxing millions of products sourced from global supply chains. This could lead to unreasonable administrative costs. To simplify the process, embedded emissions will likely be based on default values per product category, reducing the burden on businesses but potentially sacrificing precision.⁴³

Alarmingly, 60% of decision-makers in companies that import specific products like iron, steel, cement, aluminum, electricity, fertilizers, and hydrogen from non-EU countries are not familiar with CBAM according to a survey by Deloitte in 2023. Furthermore, nearly a third of affected companies were entirely unprepared for CBAM’s introduction just two months before its scheduled start (see figure 2). Additionally, 56% of respondents expect CBAM to have significant financial impacts on their businesses.⁵⁰ Lack of information and preparation of companies on CBAM could be a barrier to sustainability as this could lead to a high risk of misreporting or miscalculation of emissions. It could also provide an incentive for designing and exploiting gaps.

The administrative load associated with CBAM is substantial, as already explanied in section 3. For instance, companies must submit self-declarations, which involve the labor-intensive task of calculating emissions, particularly when determining actual emissions – a process that itself adds administrative complexity. Moreover, authorized declarants must adhere to strict documentation and retention obligations concerning the data used to calculate embedded emissions. They are also required to ensure that the total embedded emissions reported in their CBAM declarations are verified by an accredited verifier.²⁹

This administrative burden raises concerns about potential hidden discrimination against im- porters. According to WTO jurisprudence, measures that impose additional administrative burdens could violate the principle of national treatment under GATT if they result in less favor- able treatment of imported goods. Whether such less favorable treatment exists must be assessed on a case-by-case basis, considering the design, structure, and anticipated application of the measure. The key issue is whether the measure negatively impacts the competitive opportunities of imported goods relative to similar domestic goods. Different regulations for imported and domestic goods do not inherently constitute discrimination; what matters is whether the same competitive opportunities for imported goods are effectively ensured.²⁹ This could appear as a clear barrier, when the compatibility of CBAM with WTO law remains questionable.

However, it is not unlikely that the additional administrative requirements under CBAM could increase importers’ operating costs and thus impair the competitiveness of imported goods, potentially constituting a less favorable treatment. Certain elements of the CBAM draft could lead to the discrimination of foreign goods. For example, a conflict with the Most-Favored- Nation (MFN) principle might arise if a CO2 price paid in the country of origin is credited but other cost-effective emission reduction measures are not.⁸ In terms of national treatment, the increased administrative burden for EU importers, compared to EU producers under the EU ETS, is a concern. The compatibility of CBAM with the GATT will likely depend on whether the measure can be justified under Article XX of the GATT, which involves a two-step test: first, determining whether CBAM can be subsumed under one of the protected objectives, thereby providing provisional justification.²⁹

Moreover, the Federation of German Industries (BDI) and the Association of German Chambers of Industry and Commerce (DIHK) have called for adjustments to alleviate the burden on small and medium-sized enterprises and to address the prevailing legal uncertainties. They suggest measures such as higher de minimis thresholds or extended use of default values. However, such adjustments could compromise sustainability or limit it if thresholds are raised. Overburdening companies could lead to incorrect reporting or even missing CBAM reports, increasing the risk of errors. Furthermore, the high level of coordination required with suppliers adds to the administrative burden.⁴⁸

4.5 Legal, political, and trade-related challenges of implementing CBAM

The introduction of CBAM by the EU is not only a significant policy move but also a highly political one, with complex implications for international trade and climate law. One critical aspect of CBAM is its approach to crediting foreign GHG emission reduction efforts, which could significantly impact the effectiveness of climate policies in third countries.⁴³⁵³ Border measures like CBAM are controversial within the context of international trade agreements, and their political feasibility remains uncertain.⁵⁴ The rapidly evolving policy landscape has yet to fully address the legal concerns surrounding CBTA, including fears of trade retaliation, potential disputes within the WTO, and questions about their compatibility with international climate change treaties.⁴⁰ Implementing a CBTA raises concerns about possible retaliatory tariffs or even trade wars, underscoring the importance of carefully designing the policy.⁴⁴ The type and breadth of emissions included, the industries targeted, and the countries to which the policy applies are all crucial factors. To ensure successful implementation, these decisions must be defensible, and there is a strong argument for developing a CBTA in collaboration with other countries rather than as a unilateral policy.

CBTAs that only cover imports (like CBAM) may be easier to negotiate as they generate public revenues, which could be redistributed to exporting countries, potentially reducing perceptions of protectionism.²⁰ However, the CBAM faces strong criticism and risks igniting trade conflicts within the WTO. Several countries have already expressed opposition to CBAM, demanding exemptions or threatening legal action and retaliatory measures.⁴⁸ There is also a danger that third countries might not accept CBAM as an imposition and interference in non-EU affairs, which is a risk for trade conflicts.⁵⁵ This could be a barrier for sustainability when there are many countries not accepting CBAM.

For a border adjustment to be acceptable to trade partners and compliant with WTO rules, it should avoid arbitrary discrimination or disguised trade restrictions. As long as foreign firms do not pay a higher CO2 price than European firms with the same specific emissions, a border adjustment would not constitute arbitrary discrimination. Nonetheless, if foreign producers can demonstrate that they are losing market share due to EU climate policy, they may use this in a potential WTO case or resort to trade retaliation.⁴¹

The EU has faced criticism for potentially discriminating against countries that do not follow its climate model, potentially breaching international trade and climate law. By only crediting direct carbon pricing instruments like carbon taxes or ETS, the EU CBAM has been accused of discriminating against exporting states that employ different regulatory approaches. This approach could be seen as inconsistent with the flexibility required under the GATT and in- ternational climate agreements like the Paris Agreement, which emphasize the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC). Moreover, pushing states to adopt direct carbon pricing instead of alternative climate policies suited to their institutional environments could result in ineffective climate regulation abroad. Critics argue that the EU’s narrow crediting approach under CBAM may pressure its trading partners to adopt a policy instrument that is not well-suited to their contexts, especially in developing countries with weaker administrative capacities. This could undermine effective climate regulation in these countries and erode the EU’s international climate leadership.⁵³ Poorer nations, which may lack the capacity to implement such policies, could find themselves at a disadvantage.⁴⁴ WTO rules further constrain the design of CBAM, and even if these rules are respected, the legal uncertainties could lead to protracted disputes and spark new trade tensions. Critics question whether the benefits of a carbon border adjustment outweigh the substantial political and legal risks, warning of the potential for it to become a tool for green protectionism.⁴³⁵⁶⁵⁷ Nonetheless, the exclusion of indirect carbon pricing instruments, which represent a significant share of global carbon pricing efforts, is problematic. This exclusion is more likely to be viewed as discrimina- tory under international trade law, particularly because it penalizes developing countries that rely heavily on indirect carbon pricing, rather than acknowledging their differentiated responsibilities and capabilities as required by international climate law.⁵³

The CBAM proposal also raises several complex WTO-related issues, particularly regarding key provisions of the GATT, such as the Most-Favored-Nation principle (Article I), National Treatment (Article III), and General Exceptions (Article XX). While supplementing the EU ETS is essential, the CBAM proposal carries risks, especially due to its limited scope covering only basic materials and its potential inconsistency with central WTO principles. Instead of expanding CBAM in a technically complex and legally challenging manner, it is recommended to enhance its effectiveness indirectly by integrating non-price-based instruments focused on transformative research and innovation support. Dedicating CBAM revenues to a major EU mission to promote new, energy-efficient production technologies and support technology transfer to the Global South could contribute significantly.²⁹

Finally, the design features of CBTA — such as coverage, adjustment levels, and overall structure — are crucial for ensuring WTO compatibility, feasibility, and political acceptability. Fremerey et al. (2022) have suggested creating a “two-speed” WTO, linking membership to climate-specific goals, which could integrate climate efforts into broader trade liberalization discussions. This approach could bring like-minded countries together within the WTO framework, but its success would hinge on key players like for example the United States as this would have a strong pull effect on other countries.⁴⁹ Still, such a framework might be a potential future driver of sustainability and the concept of a CBTA.

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