EU Carbon Border Mechanism Could Boost Global Emissions Cuts by 73 Percent

The European Union's Carbon Border Adjustment Mechanism could increase global greenhouse gas emissions reductions by 73 percent compared with EU climate policy acting alone, according to a new study by the Potsdam Institute for Climate Impact Research published in the Journal of the Association of Environmental and Resource Economists. The researchers find that CBAM can curb carbon leakage and push trade partners to adopt domestic carbon pricing.

The Potsdam Institute study models the economy-wide and trade effects of CBAM, finding that the mechanism creates financial incentives for exporting countries to adopt their own carbon pricing systems in order to retain competitiveness in EU markets. Countries that implement domestic carbon pricing can potentially exempt their exporters from CBAM charges, effectively sharing the economic benefit of carbon pricing revenue between the exporting country and the EU. This dynamic, the researchers argue, could catalyse a broader global carbon pricing coalition.

The findings have direct implications for India, which is already navigating CBAM compliance costs for steel, aluminium and other exports to the EU. India's Carbon Credit Trading Scheme, operational in 2026, covers seven sectors and approximately 490 industries with an estimated 477 million tCO2e of coverage. If India can demonstrate that its domestic carbon pricing delivers emissions reductions equivalent to or exceeding CBAM requirements, it may be able to negotiate relief from the border charge — converting a trade disadvantage into a driver of domestic climate policy.

The study's optimistic global emissions impact projection of 73 percent above EU-only policy is contingent on broad adoption of carbon pricing globally — an outcome that depends on political choices well beyond the EU's control. Critics note that CBAM's current design covers only some sectors and does not account for Scope 2 or 3 emissions, limiting its global leverage. Nevertheless, the PIK research adds to the academic case that carbon border mechanisms, despite their trade friction, can function as a tool for spreading carbon pricing norms globally.

Key figure — 73% increase in global emissions reductions compared with EU-only climate policy