CBAM or carbon tariffs? Europe’s climate policy borrows Trump’s protectionist playbook

The European Union’s (EU) latest instrument to tackle emissions, the Carbon Border Adjustment Mechanism (CBAM) came into force on January 1, 2026. Its intellectual roots, however, were planted nearly two decades earlier. In 2007, then French President Jacques Chirac proposed levying a carbon tax on goods imported to the EU. While that proposal was shelved at the time, CBAM has now found its way back onto the policy agenda.

When the world criticised US President Donald Trump’s tariff hikes as overt protectionism, the EU had been able to advance CBAM as protectionism disguised as climate leadership. CBAM mandates importers to pay for the carbon emissions embedded in certain products such as steel, cement, aluminium, fertilisers, hydrogen, and electricity that enter the EU under its Emission Trading System (ETS). The mechanism was introduced following protests from European producers, who argued that while they were subject to strict emission obligations, imports from developing countries faced no such constraints and were therefore significantly cheaper. CBAM, according to Brussels, is intended to “level the playing field”.

The EU's justification for CBAM begins with carbon leakage. When domestic producers bear the cost of strict climate regulations on the continent, many shift operations to developing countries where they receive regulatory leeway, undermining efforts to reduce global emissions. Importers are therefore able to bring products into the EU at lower prices due to fewer restrictions imposed in their home countries.

Further, European steelmakers, cement producers, and others pay between €60 and €75 per tonne of CO2 under the ETS, while many importers, despite using emission-intensive production methods, escape this cost. Studies cited by the European Commission suggested that, without border adjustments, carbon leakage could reach up to 0.19 tonnes for every tonne of CO₂ reduced within the EU. CBAM aims to close this loophole by imposing a carbon cost regardless of where goods are manufactured, an argument that has environmental merit, at least in principle.

Proponents of CBAM are also positive about its potential impact on the developing world. They argue that CBAM will encourage manufacturing hubs across the globe to adopt more sustainable practices, reduce their carbon footprint, and thus lower import costs over time.

However, a more detailed analysis suggests that CBAM is not merely a climate tool. It is uncannily similar to Trump's tariff strategy during his second term, except that the former is veiled under a safe cloak of environmentalism. The underlying logic behind both measures remain the same. When domestic producers face rising costs due to factors such as labour standards or environmental rules, the simplest way to restore competitiveness is to impose equivalent costs on imports.

This partial approach is evident from the fact that CBAM would begin penalising importers from 2026, while EU industries will continue to receive allowances until 2034. More specifically, EU producers will receive 97.5% free allowances in 2026, with the percentage declining gradually each year: 97.5% in 2026, 95% in 2027, 90% in 2028, 77.5% in 2029, 51.5% in 2030, 39% in 2031, 26.5% in 2032, 14% in 2033, and zero by 2034. This eight-year window effectively controls competition and protects the market in favour of local manufacturers in the EU.

In addition, importers must content not only with the CBAM levy but also with significant compliance costs. Major manufacturing hubs, including India and other South Asian nations, often lack the technology and resources required to track the carbon footprint of their products. This requires investments in enterprise resource planning (ERP) software and third-party applications, which are costly. As a result, CBAM could impose substantial financial burdens on importers and adversely affect their bottom lines. Countries that were once exploited under colonial rule risk having their development derailed once again by policies that render their industries uncompetitive.

According to a report by Grant Thornton Bharat, CBAM-related obligations could amount to as much as €605 million by 2024. This figure includes the cost of building the digital infrastructure required for emissions tracking, excluding the carbon penalty itself.

The next question is: where does the money - approximately €1.5 billion by 2028 - that CBAM collects from developing countries go? According to European Commission and EU budget allocation documents, around 75% of the CBAM proceeds go towards funding the EU budget, while the remaining 25% stays with member states. This effectively means that developing countries are funding the EU, despite having been historically exploited by these nations during the colonial era.

A clear example is Mozambique, a Portuguese colony until 1975, which is expected to witness a GDP decline of approximately 2.5% once CBAM is implemented. Thus, CBAM, in effect, rather than being primarily used to control carbon emissions, follows an extractive logic that raises revenue from emerging economies to fund European public spending.

For India, the stakes are high. The EU accounts for 17% of India's total merchandise exports in FY2024, with steel among the exported commodities. The Indian steel industry, which primarily relies on blast furnaces, emits between 2.2 and 2.5 tonnes of CO2 per tonne compared to the EU benchmark of 1.6–1.8 tonnes. These excess emissions will now be taxed, potentially raising export costs by an estimated 20–35%. To counter this outflow of funds from Delhi to Brussels, the Indian government has initiated plans to develop a domestic carbon credit system. However, this will require companies to upgrade IT systems, strengthen supply chain reporting, and invest in cleaner technologies.

In conclusion, CBAM should be contested not for its stated climate intent, but for its unilateral design. Like Trump's tariffs, the burden is shifted onto trading partners. The parallels with Trump's tariff regime are uncomfortable but undeniable: both use the language of crisis to justify protectionism, both impose disproportionate costs on developing economies, and both prioritise domestic competitiveness over collaborative global solutions. Europe may speak the language of climate justice, but if CBAM continues in its current form, its practice may resemble Trump's trade policy, only greener on the surface.

Climate change demands global cooperation, and compelling developing economies to fund the EU budget risks alienating precisely those partners essential to the mission.

(This article is written by Ankit Khare and Yedhu Mohan are PGDM students at S.P. Jain Institute of Management & Research (SPJIMR). This is an opinionated article; EPN has nothing to do with this editorial.)