Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the EU Carbon Border Adjustment Is Reshaping Global Trade
Transcript
- Lucas: Luna, the European Union's Carbon Border Adjustment Mechanism — CBAM — is now fully operational as of this year, and the first few months of data are starting to tell a clear story. Luna: Yeah, this is the big climate trade policy that everyone's been watching. Remind me, what exactly changed in 2026? Lucas: So the transition period ended in December 2025. Starting January 1, importers of steel, aluminum, cement, fertilizers, electricity, and hydrogen now have to purchase CBAM certificates at a price linked to the EU Emissions Trading System. That carbon price has been hovering around 75 to 80 euros per ton of CO2 this year. Luna: And we're already seeing an impact on trade volumes. I saw numbers from the European Commission showing that in the first quarter of 2026, carbon-intensive imports from non eu countries dropped about 12 percent compared to the same period last year. Lucas: That's a significant drop. And it's not evenly distributed. The biggest declines are coming from countries that don't have their own carbon pricing — places like India, Brazil, and Turkey. For them, CBAM adds a cost that can be 20 to 30 percent on top of the product price, depending on the emissions intensity of their production. Luna: Right, because if your domestic industry isn't already paying a carbon price, you're essentially paying the EU's price at the border. That's a big competitive disadvantage compared to, say, a European producer who already includes that cost. Lucas: Exactly. And this is where the policy gets really interesting. It's designed to prevent 'carbon leakage' — the idea that European companies would move production to countries with weaker climate rules. But the side effect is that it's becoming a de facto trade barrier for emerging economies. Luna: Let's talk about a specific sector. Steel is probably the most exposed. India is the world's second-largest steel producer, and the EU is a major export destination. What are Indian companies doing? Lucas: Indian steel exporters are seeing their cost advantage erode. According to a recent report from the Institute for Energy Economics and Financial Analysis, the CBAM surcharge on Indian steel exports to the EU could be around 25 to 30 euros per ton. That's roughly 10 percent of the current steel price. So Indian mills are scrambling to reduce their carbon footprint — investing in scrap-based electric arc furnaces and green hydrogen pilots. Luna: But that takes time and capital. In the short term, some of that steel is probably just being diverted to other markets like Southeast Asia or the Middle East, where there's no carbon border tax. Lucas: That's exactly what we're seeing. Indian steel exports to the EU were down about 15 percent year-over-year in Q1, while exports to the UAE and Vietnam were up. So CBAM is reshaping trade routes, not just reducing emissions. And it's not just steel — aluminum from Brazil and cement from Turkey are seeing similar shifts. Luna: Which brings up a bigger question: is CBAM actually reducing global emissions, or is it just moving them around? Lucas: That's the trillion-dollar question. If the diverted goods are produced the same way and sold elsewhere, global emissions don't drop — they just relocate. The EU argues that CBAM incentivizes other countries to set their own carbon prices to capture the revenue instead of letting the EU collect it. And we are seeing some movement there. Luna: Give me an example. Lucas: China expanded its national carbon market in 2025 to cover more sectors, and it's now piloting a carbon border adjustment of its own — partly as a response to the EU. And Turkey announced in April that it's working on a domestic emissions trading system to launch by 2028, specifically to align with CBAM requirements. Luna: So in a way, CBAM is acting as a catalyst for carbon pricing globally. But it also creates friction. Developing countries at the WTO are arguing that CBAM discriminates against them because they have less capacity to decarbonize quickly. Lucas: Yeah, and the EU has tried to address that by allowing the deduction of any carbon price already paid in the country of origin. So if India sets a carbon price of 20 euros per ton, Indian exporters would only pay the difference — 55 to 60 euros — at the border. That's the design, anyway. In practice, verifying those domestic carbon prices is complex. Luna: And what about the US? The US doesn't have a federal carbon price, so American exporters face the full CBAM surcharge. That's a growing point of tension in us eu trade relations. Lucas: Right, and you can see it in the data. US exports of steel and aluminum to the EU were down about 8 percent in Q1 — not as severe as India, but still notable. Some US producers are pushing for a domestic carbon price or a US carbon border adjustment just to negotiate from a position of strength. Luna: There's a bill in Congress — the Clean Competition Act — that would create a US carbon border fee. It hasn't passed, but the idea is gaining traction, especially now that CBAM is real and biting. Lucas: So we're potentially looking at a world where multiple major economies have carbon border adjustments, each with their own rules and prices. That could get messy for global trade — different carbon accounting methodologies, different exemption criteria, different administrative procedures. Luna: It sounds like the start of a fragmented system. But maybe that's better than no system at all. Lucas: Look, I think the core question is whether CBAM actually drives decarbonization in export industries. The early evidence is mixed. Some companies are investing in cleaner production. Others are just finding new customers outside the EU. The long-term effect will depend on how quickly other regions adopt their own carbon pricing and how effectively the EU uses the revenue — it's supposed to support climate action in developing countries. Luna: If today's conversation was useful to you, if it gave you something to think about for your own work, these episodes stay ad-free because of listener support. You can help keep that going at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. We hear from listeners who say this show helps them make sense of complex trade policies, and that's exactly why we do it. Luna: Alright, back to CBAM. One more thing I want to touch on: the administrative burden. Importers have to report embedded emissions for every shipment, verified by accredited third parties. That's a real cost for small and medium-sized businesses. Lucas: Yes, and the EU has tried to simplify it with default values for certain products if you can't provide verified data, but those default values are set high — essentially a penalty. So companies that don't invest in measuring their emissions end up paying more. That's by design, but it's tough for smaller suppliers in developing countries. Luna: And there's also the question of scope: right now CBAM covers direct emissions from production. But there's talk of expanding it to include indirect emissions from electricity use and even some downstream products. That would significantly widen the net. Lucas: The European Commission is supposed to review CBAM by the end of 2026 and propose expansions. I expect we'll see scope added for more sectors — maybe chemicals, paper, and glass — and possibly indirect emissions. That would bring more of the economy under the mechanism. Luna: Let's zoom out for a second. CBAM is really the first major attempt to link climate policy and trade policy in a binding, comprehensive way. If it works — or even if it doesn't — it's going to set a precedent for decades. Lucas: Absolutely. And I think the key takeaway for our listeners is that if you're in any business that trades carbon-intensive goods with the EU, or if you compete with companies that do, you need to understand your carbon footprint now. The cost of inaction is only going to rise. Luna: And not just the EU — as we've seen, other countries are watching and planning their own versions. Carbon is becoming a currency in global trade. Lucas: That's a great way to put it. The question is whether that currency will unify or fragment markets. And that's a story we'll be following closely.