Global CBAM Expansion: UK & Australia Join EU as Equity Concerns Mount

February 26, 2026 — While European carbon traders remain fixated on the internal hemorrhage of the EU ETS—where prices have crashed following Italy’s suspension request and industrial revolt—a more structural transformation is solidifying at the bloc’s borders.

As of January 1, 2026, the EU’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase, turning what was a reporting exercise into a financial liability. But Brussels is no longer acting alone. A global cascade of "me-too" border adjustments is accelerating, creating a fragmented, high-stakes compliance environment that threatens to wall off major markets from the developing world’s export base.

For carbon market professionals, the era of "carbon leakage" debates is ending; the era of carbon protectionism has begun. The result is a looming collision between G7 climate ambitions and the economic realities of the Global South—a tension that market mechanisms alone are failing to resolve.

The Contagion Effect: Beyond Brussels

The EU’s first-mover advantage has forced trading partners to align or pay up. The United Kingdom has confirmed its own CBAM will commence on January 1, 2027, deliberately lagging the EU by one year to observe implementation pitfalls. Detailed in the Finance (No.2) Bill 2025-26, the UK mechanism mirrors the EU’s sectoral scope—aluminium, cement, fertiliser, hydrogen, iron, and steel—but notably excludes electricity, a divergence that creates immediate arbitrage complexity for cross-channel power trading.

Australia is following suit. The Carbon Leakage Review released on February 13, 2026, explicitly recommends a CBAM for cement and clinker, with steel likely to follow. Meanwhile, in Washington, the Clean Competition Act—reintroduced in the 119th Congress—proposes a $60/tonne fee on carbon-intensive imports, escalating at 6% annually.

The implication for compliance desks is severe. We are moving from a single standard (EU) to a "spaghetti bowl" of border adjustments. A multinational steel producer in India must now calculate embedded emissions for the EU (using ETS benchmark pricing), the UK (using UK ETS pricing with distinct free allowance adjustments), and potentially the US (using performance standards).

The Equity Crisis: The "Double Penalty"

The proliferation of these mechanisms has exposed a gaping hole in international climate policy: the lack of a viable transition strategy for Least Developed Countries (LDCs).

The data paints a stark picture of exposure. Mozambique is the canary in the coal mine. With 97% of its aluminium exports destined for the EU, the country faces a GDP contraction estimated at 0.6% to 1.6% due to CBAM levies. Mozambique’s aluminium production emits roughly 7.4 times the carbon intensity of the average EU producer, creating a tariff barrier that could render its primary export uncompetitive overnight.

Similarly, Ukraine—whose electricity exports are vital for both revenue and EU energy security—faces a 0.5% GDP hit. Across the African continent, exports to the EU are projected to decline by 5.72% under full implementation.

This creates a "double penalty": developing nations, which contributed negligible historical emissions, are bearing the highest adaptation costs while simultaneously facing new trade barriers that strip them of the revenue needed to decarbonize.

The Revenue Recycling Myth

The central friction point remains the destination of CBAM revenues. The European Commission estimates annual revenues of roughly €1.5 billion from 2028, though independent estimates suggest the figure could reach €19 billion depending on carbon price trajectories and the speed of the free allowance phase-out.

Despite rhetorical commitments to "international climate finance," the mechanism for recycling these funds remains opaque. Currently, CBAM revenues are designated as "own resources" for the EU budget, primarily to service debt from the NextGenerationEU recovery fund.

While the EU has signaled intent to provide technical support, there is no automatic mechanism redistributing levies back to the exporting nations to fund their green transition. This has drawn sharp rebukes from Brazil and India, with the latter threatening WTO challenges. For the Global South, this looks less like a climate club and more like a fiscal transfer from poor to rich.

The "Resource Shuffling" Risk

For traders and strategists, the immediate market response to this inequity will likely be resource shuffling rather than genuine decarbonization.

Exporters in developing nations are incentivized to segregate their supply chains. "Clean" steel produced with electric arc furnaces will be directed to CBAM jurisdictions (EU, UK), while "dirty" blast furnace steel will be diverted to markets without border adjustments (Asia, domestic consumption).

This allows exporters to minimize CBAM liability without reducing aggregate global emissions—a phenomenon that undermines the environmental integrity of the policy while complicating supply chain verification for EU importers.

The Crediting Trap: Article 6 vs. CBAM

A critical unresolved question is the interaction between CBAM and international carbon credits. Under current EU regulations, importers can deduct carbon prices paid in the country of origin. However, this deduction applies only to explicit carbon pricing (taxes or ETS). It generally excludes:

• Voluntary carbon credits (VCM).
• Renewable energy subsidies.
• Regulatory mandates.

This creates a massive disadvantage for countries like the US (which relies on subsidies via the IRA) or developing nations using non-market mechanisms.

While the COP30 dialogues initiated discussions on interoperability, the EU remains hostile to allowing Article 6.4 credits to offset CBAM obligations. As noted in our coverage of France's position, there is deep resistance to diluting the EU price signal with international credits. This rigidity forces developing nations to either implement their own domestic ETS (as Turkey and Indonesia are rushing to do) or face the full brunt of the levy.

What to Watch

For market participants navigating this fracturing landscape, three signals will define the next 12 months:

• UK Secondary Legislation (Spring 2026): Watch for the specific methodology on "carbon price relief." If the UK adopts a more lenient recognition of foreign non-price policies than the EU, it could create a trade diversion where goods flow into the UK to avoid the stricter EU net.
• The "Downstream" Expansion (Q4 2026): The Commission is preparing to expand CBAM to downstream products (cars, machinery) by 2028. This will exponentially increase the number of affected importers and could trigger a wider trade war with China, whose electric vehicle exports would be directly targeted.
• WTO Dispute Filings: India and Brazil have paused formal litigation pending diplomatic talks. If the EU refuses to ringfence CBAM revenues for LDC decarbonization, expect a formal WTO challenge that could test the legal viability of the entire mechanism.

The CBAM wave is no longer a forecast; it is an operational reality. But as the walls go up, the question of who pays for the transition outside the fortress remains dangerously unanswered.

---

This analysis is part of VCM.fyi’s ongoing coverage of the 2026 Carbon Market Crisis.