Climate dumping: The hidden threat to Europe’s green transition

On a hot day, you grab a fizzy drink can labelled as ‘sustainably produced’. But while the drink itself may be low-carbon, what about the can? If the aluminium was produced in a coal-powered factory in a country with low environmental standards, the can of soda could come with a high carbon footprint. 

This scenario is essentially climate dumping. Carbon-intensive production is outsourced to countries with weaker regulations. The finished goods are sold in regions with stricter climate targets, like the EU.  

Companies in the EU often outsource the most carbon-intensive aspects of their product-manufacturing process

How can a product truly be green if its components are not? And how can governments accurately assess the real carbon footprint of a product? 

Climate dumping in detail

The EU has tougher rules on carbon output than some other countries. So, companies in the EU often outsource the most carbon-intensive aspects of their product-manufacturing process, such as smelting aluminium or producing cement, to countries with less stringent carbon regulations. The company may then claim to produce ‘low-carbon’ goods, but in reality, it is only counting the carbon output from its EU-based operations. The least environmentally friendly processes may have taken place in China, India, or other countries. 

This practice distorts competition, undermines the EU’s efforts to lower carbon output, and conceals the true environmental impact of global value chains (GVCs). 

It’s a widespread problem: over half of global industrial emissions between 1988 and 2015 can be traced back to just 25 corporations. And because GVCs are so complex, it’s challenging to determine who is responsible for those emissions, let alone regulate them. 

Why it’s a problem

The EU’s Fit for 55 plan is a commitment to cut emissions by 55% by 2030. But if goods consumed in Europe are made elsewhere with high emissions, the climate benefits are lost, and EU companies are placed at a disadvantage for trying to do the right thing. Emissions are being lowered; they are just being ‘dumped’ on developing countries. 

Esade Professor Valentina De Marchi argues that supply chain emissions must be accounted for if we are to meet global climate goals. "Most multinational enterprises no longer carry out the full range of activities involved in producing goods on their own but govern complex networks of suppliers that stretch across borders," she notes, calling for shared responsibility across all stages of production throughout the GVC. 

Europe gets tough: CBAM

The EU has long operated its Emissions Trading System (ETS), which effectively allows companies to ‘pay to pollute’ by purchasing emissions allowances. But ETS only applies within the EU. To crack down on carbon dumping, the EU is launching a new tool: the Carbon Border Adjustment Mechanism (CBAM). 

With CBAM in force, the idea of carbon pricing extends to imports. “CBAM is not a trade barrier,” said Vicente Hurtado, Head of Unit for CBAM and Green Taxation at the European Commission, in a recent Esade-Fundación Repsol seminar. “It’s a measure to promote the decarbonization of the production of these goods.” 

From 2026, importers will pay a carbon price through CBAM certificates

CBAM’s impact is expected to be strongest on carbon-intensive imports such as steel, aluminium, cement, fertilizers, hydrogen and electricity. Reporting the carbon content of these goods has been required since 2023. However, from 2026, importers will pay a carbon price through CBAM certificates, which are estimated to cost around €100 per tonne of CO₂, parallel with ETS prices. 

The impact could be substantial. As Deloitte estimates, importing one tonne of high-emission aluminium could cost EU traders over €1,000 in CBAM fees. 

Early impacts and global knock-on effects

CBAM is already influencing global behaviour. Turkey has submitted climate legislation to launch its own ETS and avoid export penalties. China is expanding its carbon market to cover more industrial sectors.  

EU traders are adapting their sourcing strategies and seeking out greener suppliers in order to lower their CBAM obligations—and make their supply chains more robust. 

Hurtado emphasised that “CBAM doesn’t target countries. What we target is companies,” noting that firms even in high-emission countries can benefit by modernizing their production processes. 

Other regions are pursuing different strategies. Many have introduced their own ETS systems, including the UK, Canada and South Korea. The United States has taken a different route: rather than pricing carbon, it is subsidizing decarbonization through legislation such as the Inflation Reduction Act, designed before Trump’s new term. While this has boosted clean energy investment in the US, critics argue that without carbon pricing, it’s unlikely to incentivize low-carbon practices throughout the entire supply chain. 

CBAM’s fairness in question

CBAM has been criticized, particularly by lower-income countries. Mozambique, for example, could see its GDP fall by 1.5% due to aluminium tariffs. Poorer nations argue that they are now being punished for emissions they didn’t cause. 

Right now, CBAM includes no requirement to redirect revenues to poorer countries, despite expert calls for using the funds to support low-carbon transitions in developing nations and avert recession-level impacts. 

Monitoring and verification remain major challenges

The European Commission is working on simplifications, including exemptions for small importers (under 50 tonnes annually). But as Hurtado made clear, “We want to treat all goods in the same way, whether they are made in the EU or imported.” 

Yet monitoring and verification remain major challenges. Factories in developing countries often don’t have the technology or data to accurately track or report their emissions. According to Deloitte, nearly three-quarters of German companies are struggling to collect the required data from their suppliers. The EU is working on default values and third-party verifiers, but critics warn the system relies heavily on company transparency in a complex global supply chain. 

The future of CBAM

CBAM is being phased in gradually. Free allowances for EU companies under the ETS will be reduced between 2026 and 2034, while CBAM obligations increase. By 2034, all affected goods will be fully covered. 

In his presentation, Hurtado explained that the Commission is considering expanding CBAM’s scope. Eventually, CBAM rules could apply to companies manufacturing cars, fridges, chemicals and other products that are carbon-intensive to produce. 

The EU is also working on anti-circumvention rules to prevent companies from evading CBAM reporting. Further research is ongoing into how to handle exports and reinvest revenues into climate finance. 

A global problem demands a global price

Climate dumping is a global issue that requires an international response. Europe’s answer—CBAM—is not without its flaws. But it should at least serve to decarbonize manufacturing supply chains across borders. 

If the countries are serious about reaching net-zero, then every tonne of carbon must be counted—and priced—fairly.