The common read on the EU's Carbon Border Adjustment Mechanism is that it works as a tariff: a carbon charge at the border that makes Chinese steel or Indian aluminium more expensive and so shifts orders toward cleaner suppliers. The evidence from Europe's own emissions trading scheme points to a different mechanism. When the EU priced carbon inside its borders, trade did not move mainly according to who paid the carbon cost. It moved according to who shared the rulebook. Research by Angelo de Santis and colleagues on the phased rollout of the EU Emissions Trading Scheme finds that imports from within the EU rose in the sectors the scheme covered, even though those suppliers were the ones paying for emissions. Exports did not change.
If that pattern carries over, CBAM's main effect on trade in 2026 and after will come through compliance friction rather than the carbon price itself. The suppliers that gain are the ones already set up to measure, verify and report embedded emissions in the EU's format. For companies exposed to covered goods, the useful numbers are verification capacity and the share of volume backed by actual emissions data, not headline tonnes of CO2.
What the ETS Rollout Actually Did to Trade
The ETS came out of a 2003 directive, began trading in 2005, and expanded in phases: a pilot from 2005 to 2007, a second phase aligned with the Kyoto commitment period from 2008 to 2012, a centralised third phase from 2013 to 2020, and the current fourth phase running to 2030. Each phase widened coverage or tightened the cap. That staggered design is what makes the de Santis study useful. Sectors came under the carbon price at different times, so the researchers could compare trade before and after each step.
A simple cost model gives a clear prediction. A carbon price raises costs for covered EU producers, so EU buyers should switch toward suppliers outside the scheme in China, India, Turkey or elsewhere who pay nothing for emissions. Intra-EU imports should fall in covered sectors.
The opposite happened. Intra-EU imports in ETS-covered sectors rose across the rollout phases. On the export side, the researchers found no measurable penalty. European exporters in covered sectors did not lose foreign sales after the scheme arrived.
The study also handles the obvious objection. Europe was integrating throughout this period through enlargement, the single market and the euro, so rising intra-EU trade might have happened regardless. The authors compared covered and uncovered sectors. Sectors under the ETS increased intra-EU imports much more than sectors outside it. Background integration cannot explain why the effect concentrates in the regulated industries.
Regulatory Alignment as a Trade Subsidy
A carbon price that pulls trade toward the producers paying it implies a benefit that outweighs the price. The source's explanation is that alignment reduces bureaucracy. A buyer sourcing from a supplier under the same emissions regime faces one set of rules on measurement, one registry, one verification standard and one enforcement authority. A buyer sourcing from outside faces uncertainty about how those goods will be treated, now or later, and has to manage that uncertainty without help.
These costs do not show up on a price list, which is why simple models leave them out. They show up as legal reviews, supplier audits, documentation, and the option value of not being exposed to the next rule change. For a procurement manager, a slightly more expensive supplier who will never create a compliance problem is often the cheaper choice once those costs are counted.
CBAM brings this logic to the border in explicit form. The definitive regime began on 1 January 2026. It covers cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, the sectors where carbon leakage risk is highest. Importers have to declare the embedded emissions of covered goods, and the certificates they surrender are priced off EU allowance auctions. The surrender obligation for 2026 imports falls due in 2027. Where an exporter cannot supply verified installation-level data, importers can fall back on default values, and the Commission has built markups into those defaults. That design choice matters a great deal. Missing data is treated as high emissions and charged accordingly.
So CBAM charges a supplier for disorganisation as well as for carbon. A Turkish or Indian mill with clean but undocumented production can end up paying more at the border than a dirtier mill with an audited emissions ledger. The ETS evidence suggests buyers will react to this friction more strongly than to the carbon cost.
The Carbon Price Underneath the Border Charge
The second input is the allowance price, which sets the size of the certificate bill once friction is resolved. The most liquid listed proxy is KRBN, a US-listed ETF that holds carbon allowance futures. Its basket is weighted toward EU allowances but also includes North American and UK contracts, so it tracks the European price with some noise from other markets.
The way this price has traded matters for the alignment argument. A volatile carbon price raises the friction cost of buying from outside the regime, because the importer is exposed to the certificate price between shipment and surrender. An EU producer's carbon exposure sits within a familiar hedging and allocation system. For an importer of CBAM goods, it is a new liability linked to an auction price they do not control. Volatility therefore strengthens the case for sourcing inside the system.
Where the Precedent Breaks
The strongest objection to this thesis concerns the period the de Santis study covers. For most of the ETS's history, the carbon price was weak or heavily cushioned. Phase one prices fell close to zero in 2007 because too many allowances were issued. Covered industries received much of their allocation for free during the early phases, and heavy industry in leakage-exposed sectors kept large free allocations well into phase four. In practice, the carbon cost that the cost model expected to push trade outward was often small.
On that reading, alignment beat cost because cost was small. If the carbon price adds little to a producer's costs, even modest compliance frictions will outweigh it. The finding may not carry over to a regime where carbon is a large share of the delivered price.
CBAM is that regime. Free allocation for CBAM sectors is scheduled to phase down from 2026 and reach zero in the mid-2030s, with the border charge rising in step. As the shield disappears, EU producers will pay something closer to the full allowance price for the first time. The ETS precedent does not directly test the outcome in which carbon cost and friction cost are both large and point in different directions.
The export finding is similarly fragile. European exporters faced no penalty under the ETS, but free allocation is the obvious reason: their carbon costs were largely absorbed before goods left the factory. CBAM charges imports and does not rebate exports. As free allocation ends, an EU steelmaker selling to the US or the Gulf will carry a carbon cost that its foreign competitors do not. The absence of an export penalty is a historical result produced by a subsidy that is now being withdrawn.
These objections narrow the thesis without removing it. The intra-EU sourcing effect probably persists, because the friction CBAM creates for outside suppliers is built into the rules through default values and verification requirements. The safe export position does not persist. Treating both findings from the ETS era as permanent mixes up a result about alignment with a result that depended on free allocation.
The UK Test Case and the Variable That Settles It
The source text notes in passing that the UK government should consider this evidence as it weighs closer regulatory alignment with the EU. That point carries more weight than it first appears to. The UK runs its own emissions trading scheme, plans its own border mechanism from January 2027, and agreed with Brussels in 2025 to work toward linking the two carbon markets. If alignment is the factor that moved trade under the ETS, a linked scheme would let British steel, cement and fertiliser enter the EU on internal terms. A separate scheme would leave UK exporters dealing with CBAM paperwork and default values like any other outside supplier. For UK producers in covered sectors, the linkage talks are a market-access issue, not only a climate-policy one.
The same logic applies to company analysis more broadly. Companies with exposure to CBAM goods will describe their position through tonnes of CO2 per tonne of output and decarbonisation targets. That disclosure answers the cost question. The ETS evidence says the friction question matters more, and it is answered by other details: how much of a company's import volume, or of its non-EU customers' volume, carries verified installation-level emissions data rather than default values, and whether its non-EU suppliers have accredited verifiers in place. A mill with a strong carbon intensity number and no verification infrastructure is worse placed than its headline suggests.
One variable decides between the two readings. During 2026 and into the first surrender cycle in 2027, analysts should track what share of CBAM declarations relies on default values and how that share changes. If default-value use falls quickly as foreign producers build verification capacity, friction is temporary, and CBAM becomes the carbon-cost tariff the consensus expects, with trade sorting by emissions intensity. If default values stay common and EU buyers shift orders toward intra-EU and linked-scheme suppliers in covered sectors, the ETS pattern is repeating: the rulebook is moving trade, and the carbon price is secondary.
The early evidence favours the second outcome, with one qualification. The ETS reordered trade while carbon was cheap. CBAM will test whether alignment still dominates once carbon is expensive, and European exporters are the group most likely to discover that the old protection has gone.
