Carbon Border Fees Threaten ME&CA Exports, IMF Projects Major Regional Impact

The International Monetary Fund, together with researchers at CERDI of Clermont Auvergne University and the IMF’s Middle East and Central Asia Department, has produced a working paper that delivers one of the most detailed examinations yet of how the European Union’s Carbon Border Adjustment Mechanism (CBAM) will reshape trade for economies in the Middle East and Central Asia. Legislated in 2023 as part of the European Green Deal and set for full implementation in January 2026, CBAM will impose a carbon-linked fee on imports of energy-intensive goods including aluminum, iron and steel, cement, fertilizers, hydrogen, and electricity. The policy is designed to curb carbon leakage, ensure that European producers are not undercut by high-emission imports, and pressure trading partners into adopting greener practices. Yet for countries that rely heavily on such exports, the measure amounts to a new kind of trade barrier. Using extensive datasets, most notably the University of Sydney’s GLORIA database, alongside IMF and World Bank sources, the researchers quantify the scale of the financial burden and highlight who stands to lose the most.

A Heavy Regional Burden

Although CBAM covers a small slice of global emissions, only about 0.2 percent, the Middle East and Central Asia (ME&CA) is among the hardest-hit regions. The IMF study calculates an annual burden of US$1.7 billion, equal to 0.03 percent of regional GDP and the equivalent of a 14 percent tariff on CBAM-related exports to Europe. That figure masks sharp contrasts. Lebanon and Tunisia are expected to bear the heaviest incidence at around 0.3 percent of GDP, while Algeria and Libya follow at 0.2 percent. By contrast, fragile and conflict-affected states with little trade exposure to the EU will experience negligible impacts. The analysis makes clear that CBAM is not just an abstract climate measure, it has the potential to carve deep grooves in the economic maps of ME&CA nations.

Why the Middle East and Central Asia Are Exposed

The drivers of this exposure differ across the region’s two subgroups. In the Middle East, North Africa, Afghanistan, and Pakistan (MENAP), the risk stems from high dependence on European markets combined with emission-heavy production processes. In the Caucasus and Central Asia (CCA), it is the staggering emission intensity of fertilizers and metals that causes vulnerability. Most countries in the study have no domestic carbon pricing in place to soften the blow. Kazakhstan, which has had a carbon tax since 2021, and Mauritania, with a scheme planned for 2025, stand out as rare exceptions. Without such policies, exporters are unable to deduct domestic carbon fees from the EU’s levy, leaving them exposed to the full force of CBAM charges. This structural weakness underscores how climate policy gaps at home translate directly into financial penalties abroad.

Sectoral Hotspots of Pain

The burden is heavily concentrated in a handful of sectors: aluminum, iron and steel, cement, fertilizers, and electricity. Libya’s iron and steel industry, for instance, faces effective tariffs nearing 60 percent of its production value, a devastating hit to a sector that is central to its industrial base. Tunisia’s aluminum and cement producers are projected to absorb tariffs ranging from 14 percent to more than 100 percent of sectoral output values. Egypt’s iron and steel exports will be hardest hit, while Morocco’s aluminum and fertilizer sectors face the greatest vulnerability. These findings mirror earlier World Bank warnings that North African exporters of carbon-intensive goods stand to suffer disproportionately from CBAM. The fiscal dimension amplifies the challenge, since in many Middle Eastern economies the affected industries are state-owned or heavily subsidized. In such cases, losses will feed directly into public budgets, making CBAM not just a trade issue but also a fiscal one.

The Road Ahead: Policy Choices and Risks

Looking forward, the IMF warns that CBAM’s bite could sharpen. Free emissions allowances within the EU will phase out by 2034, and Brussels has left open the possibility of extending the mechanism to additional sectors such as chemicals and petroleum products, and even to scope 3 emissions that capture supply-chain pollution. For ME&CA economies, that would multiply the costs. Policymakers therefore face a strategic crossroads. Introducing domestic carbon pricing would reduce the net burden, while investing in renewable power and energy efficiency could cut emission intensity at the source. Diversifying trade away from Europe offers another pathway, though not one easily achieved given historical trade patterns. Above all, governments must recognize that reliance on carbon-heavy exports is becoming increasingly untenable in a global economy pivoting toward decarbonization.

CBAM is both a climate milestone and a trade shock. For the EU, it represents leadership in climate governance; for its partners in the Middle East and Central Asia, it is an unavoidable reality check. Lebanon’s concentrated exposure, Tunisia’s cement and aluminum dependence, and Kazakhstan’s relative insulation from its own carbon tax illustrate the diversity of challenges ahead. There will be no one-size-fits-all response. Yet the message is universal: without proactive measures, CBAM could erode competitiveness, strain fiscal balances, and deepen structural weaknesses. With foresight and reform, however, it could catalyze long-overdue diversification and energy transition. For ME&CA policymakers, the choice is stark, either adapt quickly to the realities of carbon-constrained trade or risk being left behind as the green economy takes hold.