In January 2026, the European Union will require importers of certain carbon-intensive goods to pay for their products’ embodied carbon emissions. The policy, known as the Carbon Border Adjustment Mechanism (CBAM), could raise the cost of exporting these goods to the EU market, potentially affecting the competitiveness of exporters.
To help developing countries assess the potential impact on their competitiveness, we devised four indexes. In this blog post, we focus on two of them. One looks at the exposure of sectors, the other at the exposure of economies. We find that although individual sectors with high emission intensities could lose market share in the EU, the overall economic exposure to CBAM charges is small in most cases.
Before we delve into the details, here is some background. The CBAM seeks to level the playing field between EU producers of carbon-intensive goods, such as steel and cement, and their foreign competitors. Importers will therefore be required to pay the same price as EU-based companies for greenhouse gases emitted in the production of those goods. The goal is to prevent so-called carbon leakage, which happens when production shifts to places where the price of emitting greenhouse gases—and therefore the cost of production—is lower.
The CBAM complements the Emissions Trading System (ETS), the cornerstone of the EU’s policy to cut greenhouse-gas emissions. Under it, the EU sets annual caps on allowable emissions from industries covered by the plan and auctions or distributes ETS allowances, which are tradable on secondary markets. A company must obtain and surrender allowances corresponding to its emissions each year; if it wishes to emit more than its allocation, it must buy more allowances. The trading sets a price on carbon, providing an incentive for firms to reduce emissions. Allowances have been trading in the range of €74–100 (USD86–116) per metric ton of CO2 over the last two years. As free allocation is phased out in the EU, the CBAM will be phased in, with prices for imported embedded emissions mirroring those paid for ETS allowances.
The CBAM initially covers six emission-intensive products: aluminum, iron and steel, cement, fertilizers, electricity, and hydrogen. It includes direct emissions (scope 1) for all products and indirect emissions (scope 2) from the use of electricity in the production of cement and fertilizer. In later years, the CBAM will likely be expanded to cover additional carbon-intensive goods.
An exporter’s exposure to the CBAM depends on two factors: how much more (or less) carbon it uses in production of the CBAM product compared with the average EU producer, and how much it depends on exports to European markets. This evaluation can be made at the level of a firm or of an industry within a country.
We measure these factors at a sectoral level, choosing databases for emissions content and trade that have global coverage (our sources are, respectively, GTAP-CE and WITS mirror data, for those technically inclined). But there are important caveats. Alternate data sources could produce different estimates, and individual firms’ emissions can vary from sector-wide averages. For example, firms that produce goods like steel for export may be cleaner than those that produce them for the domestic market. In that case, our metric may overstate exporters’ exposure to CBAM. (Readers interested in other technical wrinkles can consult our methodological note.)
To measure how much carbon costs add to production—what we call the carbon-cost intensity—we use a price of USD100 per metric ton of carbon dioxide, which is roughly what companies pay in the EU’s carbon market today. We multiply this price by the amount of carbon dioxide to get the carbon-cost intensity. So, for example, if a steel plant outside of the EU emits twice as much carbon dioxide as the average EU steel plant, it will face much higher carbon costs when selling to the bloc. This difference in carbon-cost intensity determines the change in competitiveness: who wins or loses under CBAM.
One of our indexes is the Trade Exposure Index. It measures the degree to which excess carbon payments—how much more an importer will pay compared with EU producers of the same product—could affect a country’s competitiveness in a particular sector. To get an index, we divide excess carbon payments by the value of exports to the world in a sector. Countries with high index scores would struggle in the EU market and risk losing market share. Clean producers that emit less than the EU average will become more competitive and could gain market share.
Consider Mozambique, which sent 97 percent of its aluminum exports to the EU in our 2022 data, as seen in the x-axis of Figure 1. Meanwhile, the country’s aluminum industry emitted 0.8 kilograms of carbon dioxide for every US dollar of exports in our 2017 data, as seen in the y-axis of Figure 1. That is 7.4 times more than the average EU aluminum producer (the orange line in Figure 1) and higher than the average of the three dirtiest EU countries (the grey line in Figure 1). Mozambique records the highest index score, indicating that its excess carbon payments would equal 6 percent of the value of its aluminum exports to the world (Figure 2). If Mozambique’s aluminum exporters have this average profile, they would lose competitiveness in the EU market.
On the other hand, Ghana, Uzbekistan, and Jordan recorded lower emission intensities than the average EU producer of aluminum; as a result, their CBAM Trade Exposure index is negative and ranges from minus 0.1 percent to minus 0.3 percent, potentially making their exports more competitive in the EU market.
Figure 1. The exposure of selected countries’ sectors to the CBAM is determined by their carbon-cost intensity relative to the EU and dependence on the EU market.
(aluminum)
Figure 2. Some countries may have high CBAM trade exposure while others may gain competitiveness in the aluminum sector.
Figure 3. For most middle and low-income countries, economic exposure is less than 0.1 percent of GDP.
Another gauge is the CBAM Economic Exposure Index. It measures total excess carbon payments across all CBAM products as a share of a country’s GDP. For most countries, the economic impact of CBAM is minimal. In figure 3, using our data, Mozambique has the highest exposure at 0.6 percent of GDP, followed by Ukraine (0.5 percent) and Egypt (0.2 percent). All other countries face exposure of less than 0.1 percent of GDP.
Our CBAM exposure indexes can serve as a starting point for identifying where deeper analysis is valuable. The World Bank is working to identify the countries that would benefit from domestic action or international assistance to reduce the unpriced carbon content of their industrial products and help improve competitiveness in EU markets. A first step is to monitor and verify current emissions from facilities to better assess actual exposure and help relatively clean firms document their intensities.
A next step is for exporting countries to consider domestic carbon pricing options; among our examples, Kazakhstan, South Africa, Ukraine, and others have implemented carbon pricing mechanisms that cover CBAM sectors. Although low prices, free allocation, and exemptions imply that the actual carbon payments made on embodied emissions—which is what CBAM adjusts for—remain slight, such instruments can provide a foundation to build stronger incentives for carbon efficiency and gain credits under CBAM. Developing countries have until January 1, 2026, to help their exporters get ready for the CBAM phase-in, with support from The World Bank Group and other international financial institutions.
Source : World Bank
