How the EU Can Turn CBAM into an Effective Tool of Climate Diplomacy

On 1 January 2026, the European Union’s Carbon Border Adjustment Mechanism (CBAM) came into full force after a three-year trial period. Now, importers of a range of particularly carbon intensive goods will be required to either buy carbon credits at the going rate on the EU Emissions Trading System (EU ETS) (currently about €72), or to prove that they paid an equivalent carbon tax when and where they were produced. The system will be gradually phased in between now and 2034, in parallel with the steady reduction of free allowances on the EU ETS. 

That CBAM made it this far can be celebrated. It did not meet the same fate as the ETS expansion – announced in 2023 with planned implementation for 2027 – or the EU Deforestation Law, both of which had their implementations delayed late last year as the EU lost ground on a number of environmental fronts in favor of Draghi-style deregulation. 

As of now, CBAM has also withstood bids to immediately introduce exemptions, most notably for India as a part of the massive new EU-India trade deal, for Ukraine, given the challenges of decarbonizing a war-time economy, and for fertilizers, despite calls from agricultural interests.  

With CBAM firmly in place, for now, it is worth evaluating the role the measure will play in the EU’s broader environmental diplomacy. The narrow logic is clear enough; any importer that wants to export to the EU will now need to pay a European carbon tax. Instead of sending this revenue to the European Union, countries now have a strong incentive to tax carbon themselves to avoid the steadily growing import fees. 

While the direction of the incentive is clear, the magnitude is not, leaving it unclear whether countries really value their trade with the EU enough to navigate the complex, and often perilous, politics of implementing a carbon price. It is not like the EU is the only major player on the global stage when it comes to trade. 

The United States seemingly cares little about the emission standards of its trading partners. Meanwhile, China, rather than scolding emerging economies for environmental transgressions, is smothering them in investments, offering infrastructure, green and brown, for anyone willing to do business. 

In this context, CBAM appears to be a stick by which to guide partners towards greener pastures. As such, CBAM risks appearing punitive, and even neo-colonial, as if the birthplace of industrialization has now decided that the fossil fuels which helped drive it to riches are no longer an appropriate means for development and growth. It’s no surprise that CBAM was a hot topic at COP30 in Brazil, where developing countries expressed well founded fears about the CBAM’s possible consequences especially for countries that rely on exporting to the EU.  

However, if the EU wants the world to radically transform to match its own environmental ambitions, it is going to need more than an import tax. What is missing is a positive European diplomatic effort that can offer real and substantial benefits to countries which are willing to play ball with the EU on environmental issues, not just the opportunity to avoid punishment. 

The EU needs to think of developing countries as strategic partners in the global effort to stem climate change and protect biodiversity. This means going beyond the reduction of trade barriers, and considering more direct means of cooperation, like, for instance, long term purchasing agreements for resources and critical materials offering above market prices. In short, and reflecting the approach of international climate agreements since the Kyoto Protocol, the EU needs to offer sufficient “carrots” to go along with the “stick” of CBAM. 

Part of this strategy should be a better targeted argument connecting the funds leaving the EU as development aid to the funds coming into the EU from CBAM. The adjustment mechanism is currently projected to raise around 1.4 billion euro a year. 

Meanwhile, the EU has announced that the adoption of CBAM will be accompanied by the launch of a 200 billion euro “Global Europe” funding scheme to support developing countries, as a part of the upcoming 2028-2034 budget. The sequence of these two stick and carrot measures notwithstanding, Europe seems ready to invest much more in its partners than it is planning to tax them. 

The trick, of course, will be ensuring these 200 billion euros actually materialize, and that when they do, they will be effectively targeted towards supporting Europe’s trading partners through the hard work of decarbonization.