CBAM: break for the border (mechanism)

Following in the footsteps of the European Union (EU), a number of countries have announced carbon border adjustment mechanisms (CBAMs) in a bid to put a fair price on the carbon emissions embedded in certain imported goods. We expect this trend to grow as nations come under economic pressure to implement CBAM or CBAM-like schemes in response to such emission-reduction regimes elsewhere. 

CBAMs are useful tools in preventing carbon leakage and promoting the growth of carbon pricing regimes. However, countries launching CBAMs without an accompanying domestic carbon price are likely to be perceived as abusing the concept and using it as a trade barrier. 

As the EU prepares to make changes to its CBAM after the initial ‘transition’ phase, Wood Mackenzie analysts recently took a look at the growth of CBAMs globally and assessed the CBAM proposals of eight countries, using the EU CBAM as a benchmark. Fill out the form to receive a complimentary extract from the report and read on for a brief introduction.  

EU leads the way in carbon border mechanisms 

The EU’s introduction of a CBAM in 2023 to complement its Emissions Trading Scheme changed the long-time status quo on carbon pricing. Europe’s CBAM aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic products. It thus encourages producers from outside the bloc to use technologies that generate fewer  emissions if they want to sell into the EU.  

Europe’s CBAM won’t be the only or last border adjustment measure. Several countries around the world are now considering CBAM or CBAM-like schemes. As jurisdictions adopt more ambitious climate policies and pursue additional goals, such as supply-chain security and industrial policy, many are actively exploring the taxation of carbon at their border to avoid becoming markets for ‘dirty’ or environmentally inefficient products.  

We expect emerging economies to develop domestic carbon pricing mechanisms and progress towards establishing their own CBAM or CBAM-like schemes. However, the growth of  uncoordinated CBAMs around the world risks creating a patchwork of policies, increasing uncertainty, administrative burdens and transaction costs for importers and exporters alike. 

Eleven countries are currently considering CBAM-like systems, even though many have yet to implement an accompanying domestic carbon pricing system. Some have announced the launch of a CBAM in tandem with a domestic carbon price. From 2019, when the EU first announced its CBAM, to the end of 2024, the number of carbon pricing mechanisms in force globally jumped from 54 to 74. 

We expect this trend of domestic carbon price launches to extend to CBAMs and  countries are unlikely to stop at just a domestic carbon price.  

When Country A introduces a carbon price at the border and domestically, Country B has three options: 

1. Do nothing and risk competitiveness loss. 

2. Adopt a carbon price, but without border controls, and risk carbon leakage. 

3. Implement both a domestic price and a CBAM to retain revenue and cut emissions. 

More developing countries are leaning towards the third option. Thailand’s draft climate change law and Taiwan’s dual carbon tax-CBAM plan take this route, for example. However, CBAMs also face criticism as a protectionist tariff, especially when applied without a domestic carbon price in operation. The US Foreign Pollution Fee bill, which was reintroduced in April 2025, could be considered a trade barrier, for instance, as the US does not impose a domestic carbon price, yet.  

Importers and exporters need to be prepared 

CBAMs schemes will inevitably vary, as they are designed to align with national climate change policies. However, all foreign producers will bear the costs of compliance, which, in some cases, may surpass the border charges themselves. This is particularly likely for exporters from less developed economies, which often have fewer national GHG reporting requirements, limited public support for decarbonisation and higher capital costs for industrial abatement. 

We believe that being prepared for this and setting up institutional processes will enable companies and facilities to remain ahead of the curve. This includes strengthening emissions monitoring capacity and data management. 

Under an emissions trading system or carbon tax, operators determine emissions at the installation level. Reported emissions must be verified to ensure data accuracy. CBAM and CBAM-like schemes apply similar rigour, but at the product level, requiring more granular monitoring, reporting and verification (MRV). 

The transition from facility-level to product-level MRV builds on facility-level MRV frameworks to meet CBAM requirements. CBAMs increase MRV complexity by requiring emissions accounting along the product value chain, necessitating precise boundary definitions and a determination of the emissions of different goods at each step of production.  

Most countries outside the EU lack established facility-level MRV or clear reporting guidance and that is something they will need to address.  

Fill out the form to receive a complimentary extract from the report.