John Maynard Keynes once said that when the facts change, he changes his mind. The words of that world famous UK economist should be top of mind for European Commission officials with regards to their green policy agenda and the EU’s Carbon Border Adjustment Mechanism (CBAM) in particular.
CBAM represents a pivotal shift in global climate and trade policy, effectively designed to extend the bloc’s carbon pricing regime to selected imports. The mechanism is well-intended in its aims to prevent “carbon leakage” as Europe tightens its emissions rules, since CBAM will require foreign producers of carbon-intensive goods – from steel and cement to fertilizers and aluminum – to purchase certificates reflecting the carbon emissions embedded in their products. Yet CBAM represents the wrong approach that will lead to negative consequences for the European economy, businesses and consumers as well as upset global trading partners.
While the EU’s green policy agenda is framed as an engine of long-term competitiveness, its near-term drag on jobs and growth is becoming increasingly evident across several energy-intensive industries, with a wider impact on the broader economy also inevitable. Stricter emissions standards, rising carbon prices and costly compliance requirements have widened the gap between European operating costs and those in jurisdictions with looser rules, prompting some manufacturers to scale back production or shift investment abroad. Small and medium-sized enterprises, in particular, report that the cumulative weight of regulatory change in Europe is outpacing their ability to adapt, constraining hiring and depressing margins.
The result is an erosion of industrial capacity that threatens to harden into structural decline unless policy support, market incentives and the pace of regulation are more carefully synchronized with firms’ abilities to absorb them.
For companies, CBAM is rapidly emerging as an operational and administrative quagmire whose practical demands risk overwhelming even well-resourced compliance teams. The mechanism hinges on overly detailed emissions reporting that, in theory, requires physical verification at overseas production sites and exhaustive track-and-trace capabilities across sprawling, multi-tier global supply chains. These are processes that are prohibitively difficult to execute and even harder to standardize. Even tiny data discrepancies can trigger penalties, yet the underlying information is often contested, incomplete or dependent on suppliers with limited technical capacity.
With no harmonized EU enforcement framework or unified IT system in place, companies face a fragmented, labor-intensive compliance landscape that effectively shifts the cost and complexity of Brussels’ climate ambition onto industry itself.
The CBAM implementing measures compound this complexity since they are a labyrinth of values and requirements. On the whole, the CBAM initiative represents the complete antithesis of the call for simplification and removing red tape – as highlighted in the 2024 Draghi report on Europe’s future and economic competitiveness – that has been weighing down Europe for so long.
Thankfully the political tide is turning against the folly of CBAM. Within the EU, the voice of business is being backed by French politicians who are attacking CBAM because it will inter alia push fertilizer prices even higher and heap more misery on farmers. Outside the EU, friendly democracies and the Global South called CBAM a thinly veiled protectionist trade measure that should be scrapped at COP30 in Belem. It will also stymie smaller countries in their efforts to decarbonize, they argue.
The European Commission should not double-down on its current wrong-headed approach but rather assess the changing reality on the ground in Europe and listen to external voices. The EU’s recent retreat from its 2035 internal combustion engine ban illustrates how even flagship green policies can be rolled back when confronted with commercial realities and political pressure. The episode also underscores a broader truth: when evidence mounts that regulatory ambition is outstripping technological readiness or economic resilience, the EU should be willing to recalibrate.
Realism and common sense is needed at a time when the EU green industry push is creaking. Stegra – which aims to build a large-scale green steel plant in Northern Sweden – has a 1.5 billion euro shortfall and could well go the same way as the infamous Swedish green failure Northvolt. At the same time the phase-out of free allowances is planned under the EU Emissions Trading System (ETS) to support the decarbonization of EU industry. This will increase the burden still further on European industry at a time when it is already struggling with rising costs and lower competitiveness internationally.
Unless the EU system is adjusted – beginning with ditching CBAM – it will raise prices across the value chain, weaken competitiveness, and further increase the risk of carbon leakage. Counterintuitively, the EU’s measures to save the environment may end up having completely the opposite effect. Given the changing reality it is high time for the EU to change its mind on its green policy.
