Supporting decarbonisation and trade in Least Developed Countries through CBAM revenues

CBAM revenues could be used to mitigate potential effects on trade of Least Developed Countries.

Trade Policy Advisers Erik Merkus and Shasa Aziz

The EU aims to achieve its climate ambitions as per its obligations under the Paris Agreement. Since 2005, the EU Emission Trading System (EU ETS) puts a price on carbon dioxide emissions embedded in the production of a number of products. As this raises production costs for EU producers, there is a risk that carbon dioxide-intense production moves abroad, something called carbon leakage. 

This could threaten EU production capacity in certain sectors. Agreed in 2023, the Carbon Border Adjustment Mechanism (CBAM) has become a central instrument for ensuring that decarbonisation efforts are not undermined by imports of carbon-intensive products from outside the EU. However, for many least developed countries, including the most climate-vulnerable ones, CBAM raises questions about how their trade opportunities are affected.

Many countries are navigating a challenging combination of climate vulnerability, limited resources for emissions reporting, and an urgent need to upgrade production systems.

In our trade-related development cooperation projects with partners in Least Developed Countries, we have noted a recurring interest in understanding the implications of CBAM for their exporters’ future access to the EU market. While reactions are varied, it is clear that many countries are navigating a challenging combination of climate vulnerability, limited resources for emissions reporting, and an urgent need to upgrade production systems in line with global climate policies. As a result, these challenges require massive investments. Recognising these circumstances is crucial if CBAM is to contribute to a just transition.

The importance of supporting Least Developed Countries in their climate efforts is not new. It is a point that repeatedly surfaces in international climate negotiations, including during COP meetings, where the need for scaled-up finance, technology transfer, and capacity building is consistently emphasised.

Allocating the EU’s CBAM revenues to climate-related support measures, such as technical assistance, emissions-monitoring capacity and access to cleaner technologies, would reinforce the EU’s commitment to the green transition. It would also help ensure that producers in Least Developed Countries are able to participate in low-carbon value chains. Integrating these perspectives into discussions on the use of CBAM revenues is therefore both timely and fully aligned with broader expectations under global climate cooperation frameworks.

The EU could consider to add a global dimension to the Temporary Decarbonisation Fund which would be equal to the available funding for EU producers.

The question of how CBAM revenues can be used is not straight-forward. Earmarking these revenues directly to support programs in Least Developed Countries may be challenging, both legally and politically. As things stand, 75 per cent of the revenues will go to the EU budget while 25 per cent will go to the Temporary Decarbonisation Fund, aimed to support EU firms in their decarbonisation strategies. Total CBAM revenues for 2028 are estimated to be 1.5 billion EUR, at an expected carbon price of 80 EUR per tonne. These revenues are projected to sharply increase over time, potentially sixfold by 2030.

The EU could consider to add a global dimension to the Temporary Decarbonisation Fund which would be equal to the available funding for EU producers. This global dimension could then be used for decarbonisation projects in Least Developed Countries. Such an approach could improve the global acceptance of CBAM, as well as other environmental policy instruments, at a moment when global trade and climate policy discussions are highly sensitive. Even then, it is just a drop in the bucket of the climate financing goals agreed at COP29 in Baku in 2024, which aimed at a global commitment of at least 300 billion USD annually.

The EU aims for CBAM to serve as a constructive tool for global climate action. Therefore, integrating a clear pathway for supporting least developed countries is not only consistent with international expectations, but it also strengthens the credibility, fairness, and long-term effectiveness of CBAM itself, and thereby the capacity of Least Developed Countries to conduct international trade.

Shasa Aziz
Trade Policy Adviser

Erik Merkus
Trade Policy Adviser

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