Can Carbon Border Taxes Curb Emissions? A Global Assessment of the EU’s CBAM Impact

In a world racing to decarbonize, the European Union has taken a pioneering step with the implementation of its Carbon Border Adjustment Mechanism (CBAM). Aimed at reducing “carbon leakage”, where production shifts to regions with laxer environmental regulations, the CBAM is designed to level the playing field for EU industries by imposing equivalent carbon costs on imports. In ADB Economics Working Paper No. 792, economists Joseph Francois and Neil Foster-McGregor investigate the true power and limits of CBAM. Using a cutting-edge computable general equilibrium (CGE) model, they simulate a variety of global carbon pricing scenarios to understand their potential to reduce emissions, reshape trade, and influence global welfare.

At the heart of the analysis lies the European Union’s reformed Emissions Trading System (ETS), which sets a market price on carbon. The CBAM supplements this system by requiring importers of carbon-intensive goods to buy certificates priced at the same rate as domestic emissions permits. This not only ensures a fair carbon cost across borders but aims to prevent industries from fleeing to low-regulation territories. Yet, as the study makes clear, the real test lies in whether such policies can meaningfully curb global greenhouse gas emissions.

Emissions Drop, But Not Far Enough

The authors simulate nine policy scenarios with different carbon prices (€100 and €200 per tonne of CO₂), varying in geographic scope from EU-only schemes to global coordination across OECD and Asian Development Bank (ADB) client countries. Their key finding: carbon pricing alone, no matter how aggressive, can only go so far.

In the most basic scenario, a €100 ETS without border taxes cuts emissions by about 358 million tonnes. Adding CBAM reduces carbon leakage and increases this figure to 418 million tonnes. Scaling the policy to all OECD countries triples the impact, while including Asia pushes reductions to nearly 3 billion tonnes. The most ambitious scenario, which adds a 50% improvement in carbon efficiency for high-emission regions (stylized technical convergence), achieves a reduction of 6.2 billion tonnes, 17.2% of global emissions.

While these numbers are significant, they still fall short of the reductions needed to meet the Intergovernmental Panel on Climate Change (IPCC) benchmarks. A 25% global cut by 2030 is required to stay below 2°C warming, and 50% to meet the 1.5°C target. Alarmingly, the study notes that four years of economic growth could offset the largest modeled emissions gains, underlining that carbon pricing must be paired with structural changes in energy systems and innovation.

Uneven Economic Impacts Reveal Equity Challenge

Carbon pricing may serve climate goals, but it comes with economic consequences. According to the model, GDP losses are most pronounced in the EU and its neighboring regions, which shoulder the immediate burden of compliance. For example, EU GDP is estimated to drop by up to 4.5% under a €200 ETS with CBAM. In contrast, countries like India and China initially benefit in some scenarios, as production shifts their way when Europe tightens its climate rules.

However, this benefit is not guaranteed. When carbon pricing is applied globally, many developing economies, especially in Asia, suffer GDP declines, unless supported by technical convergence measures. In the most equitable scenario modeled, poorer regions gain substantially from improved energy efficiency. For instance, Central and West Asia’s GDP rises by over 12%, and Sub-Saharan Africa sees a 1.4% boost. These results confirm IPCC warnings that poorly designed climate policies can exacerbate global inequality unless technology transfer and financing are prioritized.

Trade Reconfigurations: Winners and Losers

The imposition of CBAM and wider carbon pricing drastically reshapes global trade patterns. Exports from nearly every region decline under higher carbon prices, with the steepest drops found in carbon-intensive sectors like electricity, petrochemicals, ferrous metals, and mining. For example, electricity trade falls by over 14% when all OECD and ADB economies implement a €200 carbon price with CBAM. In contrast, low-emission sectors such as pharmaceuticals and public services fare much better, some even growing under technical convergence.

Developing regions located near the EU, such as Eastern Europe, North Africa, and Central Asia, are among the hardest hit. Their exports to the EU could plummet by up to 15% in some scenarios. However, strategic convergence and modernization could turn the tide. In Scenario 9, India, Southeast Asia, and Sub-Saharan Africa all see improved export performance and modest trade gains.

A Call for Cooperation and Innovation

The authors conclude that carbon pricing, though powerful, cannot deliver net-zero targets on its own. Even the most ambitious border carbon tax regime, when implemented in isolation, cannot offset the emission pressures generated by ongoing global growth. True climate progress will depend on a combination of coordinated policy action, widespread technology transfer, and transformative innovation in energy systems and industrial processes.

Moreover, fairness must guide the global transition. Without targeted support and inclusive financing, developing economies risk being priced out of trade and growth opportunities. Conversely, smart policies that incorporate flanking measures and promote cleaner production methods can yield both climate and development wins.

In essence, the study is both a roadmap and a warning: carbon border adjustments like CBAM are necessary tools, but they must be part of a broader climate strategy that prioritizes global solidarity, equitable burden-sharing, and bold innovation.