The EU’s reliance on the new Carbon Border Adjustment Mechanism (CBAM) as a solution to climate change is fast becoming a costly mistake for European businesses and innovation, potentially also undermining global climate cooperation. Ensuring the success of the green transition will require prioritising innovation rather than relying on regulatory measures.
The green regulatory landscape in the EU has seen the introduction of the Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026. Presented as a key initiative aimed at tackling carbon emissions and preventing carbon leakage, it aims to combat businesses transferring their production to other countries to avoid regulations. As such, CBAM seeks to impose carbon costs on imported goods from non-EU countries, encouraging industries globally to align with the EU’s climate goals.
However, while CBAM intends to reduce Europe’s carbon footprint, these measures could risk placing a heavy burden on businesses without delivering the intended long-term results. These measures could erode Europe’s competitiveness particularly in some industries like steel, aluminum, and manufacturing and have a profound impact on its already slowing economy. CBAM also raises concerns about the broader economic and geopolitical implications it might have for developing countries.
The introduction of CBAM will impose significant compliance costs on businesses, potentially impacting their global competitiveness. By focusing on regulatory measures without tackling the underlying issue of innovation gaps in green technologies, the EU risks hindering the transition to a low-carbon economy. Instead of progress, these measures may add financial burdens, diminishing Europe’s ability to lead in the global green economy.
The mechanism, intended to be followed by other countries, is also under active consideration by the British government. However, the Growth Commission’s paper on the impact of this mechanism found the UK’s GDP per capita could see significant losses, ranging between approximately £150 and £300. This highlights potential risks for the EU, too, where similar policies might lead to reduced economic growth, particularly for industries in countries heavily reliant on exports. If the EU pursues regulatory measures like CBAM without focusing on innovation-driven solutions, it could face comparable economic challenges, hindering its green transition while also slowing overall competitiveness.
According to another study from the UK, this time from the Institute for Free Trade, the only way to manage global warming effectively is through substantial investment in new technologies, with the private sector being the key driver, meaning lower taxes, lighter regulations, and freer trade, rather than relying on heavy-handed measures.
The reality, whether we like it or not, is that meaningful action on any major issue including climate change is challenging if the state takes the lead. Instead, regulators should look to align market incentives so that the private sector can spend its own money on risky new technologies and innovations. The findings of the Climate & Freedom initiative also confirms the logic behind this approach and suggests a path forward for pro-market green policymaking, highlighting the crucial role of market incentives in driving meaningful progress on climate change and other major issues. Instead of adopting punitive measures like CBAM, we should focus on policies which would foster economic growth through positive incentives.
Introducing Clean Tax Cuts to incentivise businesses in developing low-emission solutions, such as zero-emission fuels and concrete, by offering tax exemptions for companies achieving unsubsidised profitability, could be one such measure, helping businesses establish a green economy while also contributing to global environmental goals. From across the Atlantic, the U.S. Treasury Department has just released final rules for technology-neutral clean electricity credits, a positive step toward fostering innovation, although the direction the new administration will take remains uncertain.
Another question to ask is whether measures like CBAM inadvertently undermine the principles of Common but Differentiated Responsibilities under the Paris Agreement. Analyses show the new measures may pose uneven risks to non-EU countries and suggest EU support can help avoid exacerbating global inequalities. Some scholars also argue that support is crucial for enabling developing countries to comply with the CBAM. In transitioning to a low-carbon economy, developing countries must be supported through capacity-building, technology transfer, and green finance, as these regions face significant challenges in decarbonising their economies. This can advance the shared global climate goals.
All in all, while the EU’s CBAM is presented as a solution to climate change, it risks creating more problems than it solves, affecting Europe’s competitiveness and businesses, as well as impacting developing countries. Better solutions are out there, and they come with less regulation and more freedom. To truly lead the green transition without crippling its economy, Europe must embrace innovation over regulation.
Bojan Lazarevski is a political scientist in international and intercultural studies based in North Macedonia. Bojan is also a writing fellow with Young Voices Europe and an activist and researcher.