For Climate-and-Trade Policies, the Principle of “Common but Differentiated Responsibilities” Cuts Both Ways

Because countries decarbonize at different rates, leakage—the displacement of emissions as emitters respond to the costs of climate policy—has become a concern (Elkerbout 2024). Leakage is a potential problem in the European Union (EU) and United Kingdom (UK), where manufacturers face carbon costs through domestic carbon pricing programs but importers of similar goods do not. Even in countries with no domestic carbon price, differences in average carbon intensity between domestic and foreign producers can motivate the introduction of new fees on imports—as with the Republican proposal for a Foreign Pollution Fee Act in the United States.

To mitigate the risk of leakage and protect the competitiveness of domestic industries, carbon border adjustment mechanisms (CBAMs) seek to level costs between domestic and foreign producers. Such policies to address leakage and level the playing field in international trade in turn raise equity concerns. Some imports that might be affected by CBAMs originate in developing countries, including least-developed ones, which are responsible for small shares of global greenhouse gas emissions and negligible shares of historical emissions. This makes CBAMs relevant to fundamental international climate policy governance issues: how to distribute the efforts of cutting global emissions, given widely divergent stages of economic development and historical responsibility across roughly 200 nations.

The principle of CBDR is the foundational precept—included in the United Nations Framework Convention on Climate Change (UNFCCC 1992; Congressional Research Service 2025) Article 3(1) of the UNFCCC is the most explicit legal expression of CBDR, followed by the statement that developed country parties to the UNFCCC should take the lead in combating climate change. The United States is a party to the UNFCCC. —that could provide guidance. Like most principles in international law, the CBDR does not have a precise, universally agreed interpretation that allows for uncontroversial translation into action. A developing country might hold that for mitigating climate change, richer, industrialized countries that contributed comparatively more to atmospheric carbon concentrations should reduce emissions faster than developing countries with lower historical emissions.

In fact, the principle of CBDR has two extensions. The first is Respective Capabilities (RC): a country’s capacities (e.g., economic or technological) to address climate change. Whereas developing countries have asserted that CBDR should be based on historical responsibility, developed countries have argued that it should be based on capabilities, giving way to the longstanding RC view (Jolly and Trivedi 2021). The second extension was added by the Paris Agreement, which states that CBDR should apply “in light of National Circumstances” (Babatunde 2019). This can be seen as another proxy for economic development, but it could also mean vulnerabilities. The wording was designed to encourage developing countries with sufficient capacity to raise their climate ambitions.

Facing new carbon border fees, some countries decry CBAMs as a violation of the principle of CBDR and charge that countries implementing CBAMs are acting contrary to the spirit of the Paris Agreement. It is easy to be sympathetic: why should countries that have contributed so little to climate change, countries that are less economically developed, face new charges on their exports imposed by those that contributed more and are more affluent?

Yet the principle of CBDR cuts both ways. If some countries are rightfully given space to move at a slower pace toward the common goals of the UNFCCC and the Paris Agreement, others will need to do more, faster.

This includes the pernicious challenge of reducing emissions from energy-intensive industries producing commodities that are heavily traded across the globe. Unlike the power sector, most energy-intensive, trade-exposed sectors do not yet have access to competitive low-carbon technologies, let alone at scale. For now, reducing a metric ton of emissions in sectors such as steel, cement, (petro)-chemicals, or glass is costly—often well above $100/ton. Decarbonizing requires deep investments to transform the industrial capital stock and replace fossil fuels with other feedstocks, or to capture the carbon. Yet, as companies pursue such investments, they will compete on global markets with producers that do not (yet) face such costs in either capital or policy. Countries that are pursuing ambitious industrial decarbonization policies and want to be leaders in achieving net-zero emissions will seek a degree of protection for their industries as they impose costs that encourage lower-carbon production.

A possible response to the CBDR-based critique could be that these CBAM policies should simply be abandoned—or that developing countries should be exempted. However, a climate policy that would lead to high levels of carbon leakage, or even loss of industrial output altogether, is not compatible with the electoral prospects of the governments that need to sustain ambitious climate policy over several decades. Furthermore, it is not clear that lower-income countries cannot benefit from CBAMs, since production in lower-income countries is not systematically more carbon intensive than that of higher-income countries (Clausing et al. 2025).

All climate and trade policies, including CBAMs, must comply with somewhat conflicting international principles. The most-favored nation (MFN) treatment obligation of the World Trade Organization (WTO) prohibits countries from discriminating between other countries (Van den Bossche 2008). Therefore, a CBAM that exempts certain countries altogether would risk conflicting with international trade rules.

Also relevant is the question of incidence: who ultimately pays the cost of these CBAM fees? Since many products subject to CBAMs face a very elastic global supply curve, importers will pass along much of the cost to consumers in the market that implements the CBAM policy. (Attempting to charge or regulate producers outside one’s home market would be an example of extraterritoriality—a more invasive type of policy than is generally part of trade policy outside sanctions; Wright and Louise 2024).

Since importers and consumers in the home market ultimately pay the cost of the fees, it is not entirely correct that producers in developing countries would pay fees that raise revenues in rich, CBAM-implementing countries. But neither is the sentiment wholly wrong: with higher prices, these producers’ goods may become uncompetitive, leading to loss of market share and revenues, especially in markets with higher elasticity of demand. Furthermore, compliance with CBAMs can be administratively burdensome, even for entities that are not the directly obligated party. Transaction costs matter and can in some cases exceed the direct costs associated with fees.

To align with the principle of CBDR, we suggest a balance that allows industrialized countries to employ necessary safeguards, such as CBAMs, as they pursue ambitious, world-first industrial decarbonization policies, while being mindful of undue consequences for developing countries. Some considerations and options follow.

4.1. Recycling of Revenues

The most straightforward way to account for the principle of CBDR might be to recycle revenues for international climate finance. One option is to recycle all CBAM revenues into a general climate finance facility (which already exists in some countries). Another option is to specifically match revenues to the countries from which CBAM-covered goods are imported. A challenge is additionality: climate finance and development aid can take several forms, and if the use of revenues from CBAMs does not increase overall climate finance, the benefit for developing countries is diminished.

4.2. Tiered CBAM Charges

CBAM design could consider lower charges for countries at lower levels of development. The International Monetary Fund’s proposal for global carbon pricing has three tiers, at US$25, $50, and $75 (Parry et al. 2021). For CBAMs, this approach could suggest that least-developed countries face one-third of the costs of developed countries (i.e., members of the Organisation for Economic Co-operation and Development), and middle-income countries face two-thirds of the costs. The rationale is equity: the effect of a given carbon price will be greater on lower-income countries. Put simply, $75/ton hurts more in Congo than in Canada, even if producers operate in the same world market. Other graduated approaches are also conceivable: for example, a discount on CBAM fees applied on the basis of GDP per capita (in purchasing power parity, PPP) relative to the CBAM-applying country.

A tiered approach could still be seen to conflict with the WTO’s MFN. Unequal treatment of countries does not sit well with trade policy generally. It explicitly benefits producers in lower-income countries relative to the CBAM-applying country. However, the principle of CBDR is differentiation by design.

4.3. Crediting Mechanisms

Under the EU and UK CBAM designs, countries have the ability to “turn off” or “turn down” compliance obligations by establishing their own carbon pricing programs. This feature has already led to an increase in carbon pricing around the globe, providing important policy spillover benefits (Clausing et al. 2024). Carbon pricing gives countries agency to reduce fees and retain revenue domestically, using it as they see fit. However, as of now, countries must have an explicit carbon price to be eligible for reduced fees. The rationale for giving credit for carbon prices already paid is to avoid double taxation. It can nevertheless be perceived as undue pressure to adopt carbon pricing as a climate policy, which sits uncomfortably with the spirit of the Paris Agreement and the principle of CDBR. Since carbon pricing requires significant administrative capacity for carbon accounting and reporting requirements, and since a given carbon price hits harder in poorer countries, the credit could be graduated—just as the border adjustment fee could be graduated. That is, an explicit carbon price paid in a developing country could be doubled or tripled when crediting for carbon prices already paid. Or it could be more gradual, through a multiplier based on relative GDP per capita.

Alternatively, for countries where it is not yet feasible to implement carbon pricing domestically, policymakers could consider allowing the use of international mechanisms instead. For example, under Article 6 of the Paris Agreement, credits could be purchased for an equivalent reduction amount, providing more flexibility to exporters. Alternatively, Article 6 credits could also be accounted for when the carbon intensity of goods is quantified—information that forms the basis of reporting under CBAMs (such as the European Union’s). However, although this approach would create demand for international carbon credits and their underlying mitigation activities, it would also reduce the incentive to consider carbon pricing domestically.

Sandler and Schrag (2024) propose moving away from accounting strictly measured in tons to recognizing investments made in decarbonization, then reducing CBAM charges by an amount commensurate with investments made. Carbon performance is already accounted for in the carbon footprint reports that form the basis of the fees on CBAM goods, but incentivizing additional investments in decarbonization through additional reductions in charges could be seen as desirable.

4.4. Treatment of Exports

Some countries have responded to CBAMs by suggesting that only exports to CBAM-implementing countries should be covered by a carbon tax, thereby limiting the exposure of their own industries to new domestic carbon costs while minimizing the effect of the CBAM fee (in so far as the carbon tax approximates the level of the CBAM fee). If the revenues from this new export-only carbon tax were then returned to industry, the CBAM effect could be seen as neutral. That very fact might make CBAM-implementing countries hesitant to consider crediting for export-only carbon taxes. Since a company or facility might produce goods for both domestic consumption and exports to both CBAM and non-CBAM countries, a foreign producer would not face the same carbon cost as a producer in a CBAM country that also applies domestic carbon pricing: the foreign producer could then still gain market share at the expense of producers that face a domestic carbon price—and that would be a form of carbon leakage.

4.5. Dual Carbon Pricing Regimes: export-only carbon taxes and graduated carbon prices

A possible compromise could balance economic development with climate and competitiveness considerations. An example could be a dual carbon pricing regime for CBAM crediting purposes: if a country implements carbon pricing that applies to all production of goods in a certain sector covered by CBAM at a level that is at least commensurate with its GDP per capita (PPP) relative to the carbon price charged in the CBAM-implementing country, an export carbon tax set at a higher level could be credited. In other words, export-only carbon prices could be seen as acceptable if the exporting jurisdiction imposes a sectoral carbon floor price adjusted for per capita GDP (PPP). This creates two tiers of pricing: a domestic minimum price that reflects economic development, and an export price that levels the playing field between exporters and producers in countries that face high carbon prices in CBAM-implementing countries.

Giving full credit for a carbon export tax applicable to shipments destined for the CBAM-implementing country allows exporting jurisdictions to capture additional revenues. Some flexibility on what form of carbon prices to credit maximizes incentives for the adoption of carbon pricing in exporting countries while incorporating equity considerations. Furthermore, allowing for domestic and export carbon price differentiation for crediting purposes retains a level playing field between the importing and the exporting jurisdictions, as well as among various exporting jurisdictions, because the fee remains equal to the general CBAM charge.

4.6. Consideration of Policy Spillover Effects

How should carbon intensity in other countries be valued to determine a basis for fees? Using country averages creates different incentives from using data provided by individual facilities or companies. In the former case, policy spillovers can be important, and decisionmakers could consider which policies are taken into account when adjusting fees for carbon costs already incurred. This could include recognition for taxes levied on energy, or other policies that affect the cost of production. Policymakers could also consider providing this exception only to least-developed or low-income countries to maintain incentives for carbon pricing policy spillovers in developed countries.

If facility-level data can be used, support for facilities to reduce their carbon is the natural mode of collaboration between Global North and South and could be facilitated through technology transfer (discussed below). However, the use of facility-level data can add to the risk of reshuffling, such that only the most efficient facilities are used for exports.

More generally, some degree of flexibility in deciding what forms of carbon pricing to credit (discussed above) could increase the feasibility for exporting countries to adopt carbon pricing domestically, which in turn further enhances global climate policy. Furthermore, carbon pricing policies also create their own spillovers: carbon pricing requires a country to collect data on emissions and energy use at power plants and industrial facilities. Experience in monitoring, reporting, and verification also makes it easier to design and implement other types of climate policy in the future.

4.7. Technology Transfer

Reacting to any policy based on carbon intensity is easier the lower-carbon one’s production is. Fees based on carbon intensity will always be lower if the carbon intensity is lower, making low-carbon technology transfer to developing countries even more important. Technology transfer can be facilitated through public-private partnerships, direct investment, and international property rights–sharing platforms.

4.8. Interoperability

Since administrative transaction costs are disproportionately burdensome for (smaller) companies in poorer countries, pursuing interoperability of carbon intensity quantification can help alleviate the effect of CBAMs (Elkerbout and Nehrkorn 2024). With CBAMs being discussed in several jurisdictions, interoperability becomes more important, lest producers face different compliance processes to trade with different countries. More generally, being mindful of trade with developing countries can be a motivating factor when considering the proportionality of design elements such as product scope: casting too wide a net—for example, by covering products with low volumes of embedded carbon—can result in disproportionate red tape for little environmental or competitive gain.

It is also important to consider how alternative approaches to border adjustment mechanisms may interact differently with the principle of CBDR. Whereas the EU and UK CBAMs are an extension of domestic policy and therefore a means to promote faster domestic decarbonization, some countries, such as the United States, have considered carbon tariff approaches. This means that under a proposal such as the Foreign Pollution Fee Act, only imports from countries above the average US domestic intensity will be subject to an ad valorem carbon-intensity based fee, without a corresponding explicit domestic policy.

Countries taking a carbon tariff approach can still institute many of the previously discussed considerations, in addition to other options. For example, the current discussion draft of the Foreign Pollution Fee Act (Senate Legislative Counsel 2024) provides the option for low- and lower-middle-income countries to enter into international partnership agreements in which fees can be reduced or eliminated. However, the principle of CBDR arguably supports pairing tariffs with domestic decarbonization, even if that does not come in the form of an explicit domestic carbon price. Without an explicit focus on domestic decarbonization, a tariff-only approach is promoting decarbonization only in importing countries, some of which may be less developed, to match the United States.

Although this Issue Brief focuses on CBAMs, all climate-and-trade policies, such as green industrial policies, can have economic spillover effects for other (developing) countries. Nevertheless, some countries that need to decarbonize industries first, and fast, may feel that such policies are indispensable to make low-carbon products competitive. In the long run, all countries could benefit from successful green industrial policy that lowers technology costs and thereby makes industrial decarbonization more feasible and cost-efficient. Countries implementing such policies should still be mindful to design them in such a way that does not unduly harm—and that may actually benefit—developing countries.

In addressing these considerations, increased international cooperation is undoubtedly helpful, but the current state of geopolitics and resistance to multilateral institutions makes for a gloomy outlook on the prospects for increased collaboration between countries. This makes bilateral diplomacy even more important to ensure that developing countries are engaged before new climate and trade laws are adopted.