Theoretical Rationale: Carbon Leakage and the Second-Best Problem of Unilateral Pricing
Carbon border adjustment mechanisms are conceptualized as second-best policy instruments addressing the competitive distortions generated by unilateral carbon pricing. In the absence of a globally homogeneous carbon price, producers in jurisdictions with high climate ambition are exposed to regulatory arbitrage. Bohringer et al. (2012) demonstrated through computable general equilibrium modeling that carbon leakage rates from unilateral climate policies can range between 5 and 25 percent depending on sectoral structure. Branger and Quirion (2014) established that the empirical evidence indicates carbon leakage risk is most pronounced in sectors at the intersection of high trade intensity and high emission intensity — cement, iron and steel, aluminum.
The theoretical justification for carbon border adjustment rests on the equalization of competitive conditions between domestic and foreign producers by imposing a fiscal charge on imported goods proportional to their embedded carbon content. This justification, however, harbors significant tensions with World Trade Organization (WTO) compatibility. The legal legitimacy of CBAM under GATT Article III (national treatment) and Article XX (general exceptions) provisions is the subject of intensive debate in international trade law scholarship (Mehling et al., 2019). The EU's CBAM design seeks to navigate this tension by positioning the mechanism as an "environmental regulatory instrument" and avoiding characterization as a trade measure.
Legal Architecture: EU Regulation 2023/956
The legal foundation of CBAM was established by EU Regulation 2023/956 of 17 May 2023 (European Commission, 2023). The Regulation is structured in organic unity with the revision of the EU Emissions Trading System (EU-ETS) Directive. The design logic of CBAM is directly linked to the phased elimination of the free allocation mechanism under the EU-ETS: free allocation is projected to reach zero along a linear trajectory during the 2026-2034 period, with CBAM obligations increasing symmetrically with this reduction.
This design serves a dual objective. First, it ensures that EU producers are progressively exposed to the full carbon cost. Second, it balances competitive conditions by imposing an equivalent carbon cost on imported products. Since the full application of CBAM obligations in the presence of free allocation would afford EU producers double protection, the simultaneous calibration of the two mechanisms has been deemed essential.
According to E3G (2024) analysis, the 265 million emission permits freely allocated to industry under the EU carbon market are worth €15.9 billion per year. With the entry into force of the CBAM, the gradual phase-out of these free allocations becomes inevitable as the EU reduces its emissions cap. However, the net CBAM cost for importers is significantly lower than gross CBAM fees; through cost recovery via higher consumer prices, the net cost remains at €1.0 billion in 2026 and €1.6 billion in 2035. China's CBAM exposure constitutes only 1.8 percent of EU exports, whereas Turkey's more intensive trade integration with the EU results in a considerably higher relative exposure (E3G, 2024).
Temporal Structure
Transitional Reporting Period: October 2023 – December 2025
The transitional period encompassed reporting obligations without financial liability. Importers were required to report the embedded emissions of imported goods falling within CBAM scope on a quarterly basis. This period served the function of enabling both EU importers and third-country producers to adapt to the system and develop their emissions data collection capacities.
Data obtained during the transitional period was used by the European Commission in calibrating the definitive regime — particularly in determining default values and updating sectoral emission intensity benchmarks (European Commission, 2024).
Definitive Regime: January 2026 Onward
Under the definitive regime, effective 1 January 2026, importers are obligated to purchase CBAM certificates corresponding to the embedded emissions of imported goods. Certificate prices are indexed to the weekly average allowance price in the EU-ETS. Quarterly surrender requirements apply, with importers required to surrender certificates pertaining to the relevant period at the end of each quarter.
Two methods are prescribed for the calculation of embedded emissions: (i) facility-level verified actual emissions data and (ii) default values established by the European Commission. Default values are standardized emission intensity benchmarks by country and product, generally set above actual values. This asymmetry creates a strong incentive structure for submission of facility-specific verified data.
Sectoral Scope and Product-Level Boundaries
CBAM covers six sectors identified as carrying the highest carbon leakage risk: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. Scope is defined at the Combined Nomenclature (CN) code level, with specific product categories and boundary definitions established for each sector.
In the cement sector, clinker and cement products are covered, encompassing both process emissions and fuel combustion emissions. In the iron and steel sector, crude steel, iron ore, ferroalloys, and specified steel semi-finished products are subject to CBAM obligations. The aluminum sector covers primary and secondary aluminum production alongside semi-finished products. In the fertilizer sector, nitrogen-based fertilizers — particularly emissions from ammonia and urea production — are included. Electricity imports fall within scope in the context of cross-border trade with neighboring countries. Hydrogen has been included given its growing strategic importance within the EU's Green Deal framework.
Emissions Accounting Methodology
The calculation of embedded emissions under CBAM encompasses three principal emission categories. Direct emissions (Scope 1) cover greenhouse gas emissions from fuel combustion and industrial processes at the production installation. Precursor emissions capture the production-process emissions of intermediate inputs used in manufacturing the final product — for example, emissions from the sintering of iron ore used in steelmaking. Electricity consumption emissions are calculated based on the emission intensity of electricity consumed during the production process.
The choice between default values and facility-specific verified data constitutes a critical strategic decision for exporters. Default values are generally set above the relevant country's average emission intensity — and in some cases approximate the emission levels of worst-performing installations — such that the use of actual data results in a lower CBAM cost in most instances. This structure creates a robust economic incentive mechanism for data quality improvement (European Commission, 2024).
Turkey's CBAM Exposure
Turkey occupies the position of most exposed non-EU trading partner to CBAM by volume. The OECD's (2025) report "What to Expect from EU CBAM" quantitatively demonstrates the concentration of Turkey's EU-bound exports in CBAM-covered sectors. The IMF's Working Paper WP/25/182 classifies Turkey among economies with the highest degree of carbon border adjustment exposure (IMF, 2025).
At the sectoral level, iron and steel constitutes the largest component of Turkey's CBAM exposure. Turkey ranks among the EU's largest steel suppliers, and a CBAM cost in the range of 60-75 euros per tonne carries the potential to directly affect the sector's price competitiveness in the EU market. The cement and clinker sector, owing to the high emission intensity inherent in process-related emissions, constitutes the second critical exposure area. The aluminum sector carries an above-average carbon footprint due to the elevated share of fossil fuels in Turkey's energy mix; nitrogen fertilizer exports represent a significant exposure item given the emission intensity of natural gas-based production processes.
At the macroeconomic scale, the potential impact of CBAM on Turkey's total exports to the EU could translate into additional costs on the order of hundreds of millions of euros annually (OECD, 2025). This cost burden will manifest either as absorption by producers or as pass-through to EU buyers, eroding price competitiveness.
In addition to the EU CBAM, the UK Government confirmed in October 2024 the establishment of a UK Carbon Border Adjustment Mechanism (UK CBAM) effective 1 January 2027. The UK CBAM will cover emissions-intensive industrial goods imported in the aluminum, cement, fertilizer, hydrogen, and iron and steel sectors, encompassing both direct and indirect emissions. Given that the United Kingdom is also a significant export market, Turkish exporters will face carbon border adjustments from both the EU and the UK from 2027 onward, making the establishment of TR-ETS and the rapid deployment of domestic carbon pricing all the more urgent (ICAP, 2024d).
Mitigation Pathways
Explicit Carbon Price Deduction via TR-ETS Article 9 Mechanism
The most direct mitigation pathway for CBAM is the deduction of an explicit carbon price paid in the exporting country from the CBAM obligation. The TR-ETS pricing mechanism envisaged under Article 9 of Climate Law No. 7552 provides the legal basis for this deduction. Three conditions must be satisfied for the deduction to apply: (i) the carbon price must be directly linked to the producer, (ii) the payment must not have been offset by free allocation or other compensatory mechanisms, and (iii) the price must be documented and verifiable.
The efficacy of the deduction mechanism is contingent, however, on the TR-ETS price being at a level comparable to the EU-ETS price. A low TR-ETS price will provide only a partial deduction, and exporters will continue paying the differential in CBAM certificates. This renders it essential that TR-ETS design be calibrated not solely from an environmental effectiveness perspective but also from a trade policy perspective (Parry et al., 2023).
Facility-Level Emissions Measurement and Verification
Since the use of default values results in a CBAM cost exceeding actual emission levels in most cases, the calculation and verification of facility-specific emission data is a strategic priority. The process that producers must follow encompasses the following steps: preparation of a facility-specific emissions monitoring plan, measurement of all emission sources within the production process in accordance with EU MRV standards, verification of emission factors and activity data by accredited verification bodies, and regular updating of facility-level carbon intensity data.
Early preparation regarding the data formats and verification standards accepted by the European Commission provides a determinative advantage in minimizing CBAM costs (European Commission, 2024).
Upstream Decarbonization Investment
In the medium to long term, the most sustainable approach to structurally reducing CBAM costs is the decarbonization of production processes. Priority investment areas in this regard include energy efficiency investments (process optimization, waste heat recovery), expansion of renewable energy use (private power purchase agreements, captive generation facilities), transition to low-carbon raw materials (increasing scrap steel ratios, alternative clinker substitution materials), process innovation (expanding electric arc furnace steelmaking, alternative binding materials in cement), and evaluation of carbon capture, utilization, and storage (CCUS) technologies.
As Bohringer et al. (2012) emphasize, carbon border adjustments have the capacity to generate a dynamic that accelerates low-carbon technology investment in producing countries — though the operationalization of this dynamic is contingent on the availability of adequate investment financing and technology access.
Supply Chain Restructuring
CBAM, by rendering the carbon content of supply chains transparent, directs exporters toward emissions optimization at the supply chain level. In this context, the substitution of high-carbon-intensity inputs with low-carbon alternatives, the incorporation of carbon intensity as a criterion in supplier selection, and the strategic restructuring of product portfolios according to CBAM exposure levels constitute steps that contribute to firms' trade policy alignment.
Compliance Architecture
CBAM Declarant Obligations
Under the definitive regime, firms importing CBAM-covered goods into the EU are subject to a registration obligation as "authorized CBAM declarants." Declarant registration is administered by the competent authorities of EU member states. Imports by unregistered declarants are blocked by customs authorities.
Reporting and Surrender Requirements
Declarants are required to report the embedded emissions of imported goods on a quarterly basis. The annual CBAM declaration must be submitted by 31 May following each calendar year. The declaration encompasses the quantity and type of imported goods, embedded emissions calculations, CBAM certificates purchased and surrendered, and any deduction claims for carbon prices paid in third countries.
Verification Requirements Under the Implementing Regulation
The Implementing Regulation mandates that facility-specific embedded emissions data be verified by independent accredited verifiers. The verification process is conducted by bodies accredited under the EU Accreditation Regulation (Regulation 765/2008). Third-country producers seeking verification must apply to accreditation bodies recognized by the EU.
Meeting verification requirements imposes a significant capacity and cost burden, particularly on small and medium-sized producers in developing countries. This dimension feeds into WTO compatibility debates concerning the distributional trade effects of CBAM (Mehling et al., 2019).
Conclusion
CBAM is a structural transformation instrument in international carbon governance that integrates the EU's climate policy with its trade policy. Turkey, owing to the concentration of its EU-bound export structure in carbon-intensive sectors, stands at the forefront of countries most affected by CBAM (OECD, 2025; IMF, 2025). Managing CBAM's impact requires, in the short term, the establishment of facility-level emissions data infrastructure, the transition to facility-specific verified data submission, and the operationalization of the TR-ETS carbon price deduction mechanism. In the medium to long term, the decarbonization of production processes, supply chain emissions optimization, and full compliance with EU MRV standards constitute the structural prerequisites for sustaining Turkish exporters' competitiveness.
References
- Bohringer, C., Fischer, C., & Rosendahl, K.E. (2012). The Global Effects of Subglobal Climate Policies. The B.E. Journal of Economic Analysis & Policy, 10(2), Article 13.
- Branger, F. & Quirion, P. (2014). Would Border Carbon Adjustments Prevent Carbon Leakage and Heavy Industry Competitiveness Losses? Insights from a Meta-Analysis of Recent Economic Studies. Ecological Economics, 99, 29-39.
- European Commission. (2023). Regulation (EU) 2023/956 of the European Parliament and of the Council establishing a carbon border adjustment mechanism. Official Journal of the European Union, L 130/52.
- European Commission. (2024). Commission Implementing Regulation (EU) 2024/1352 establishing rules for the application of CBAM. Official Journal of the European Union, L Series.
- IMF. (2025). Carbon Border Adjustment Mechanisms: Trade Impacts and Developing Country Exposure. IMF Working Paper WP/25/182. Washington, DC: International Monetary Fund.
- Mehling, M.A., van Asselt, H., Das, K., Droege, S., & Verkuijl, C. (2019). Designing Border Carbon Adjustments for Enhanced Climate Action. American Journal of International Law, 113(3), 433-481.
- OECD. (2025). What to Expect from EU CBAM: Trade, Climate, and Competitiveness Implications. Paris: OECD Publishing.
- Parry, I., Black, S., Minnett, D., Mylonas, V., & Vernon, N. (2023). How to Cut Methane Emissions: Turkey. IMF Working Paper WP/23/108. Washington, DC: International Monetary Fund.
- E3G (2024). An Updated Assessment of the EU Carbon Border Adjustment Mechanism. London/Berlin: E3G.
- ICAP (2024d). UK Emissions Trading Scheme Factsheet. Berlin: International Carbon Action Partnership.