Over the past decade, the world has continuously faced increasingly severe challenges arising from climate change. This issue is no longer confined merely to environmental considerations or domestic public policy; rather, it has evolved into a significant mechanism shaping the direction of the global economic and international trade systems.

Within this context, the European Union has developed a novel legal instrument known as the Carbon Border Adjustment Mechanism (CBAM). This mechanism serves to connect environmental policy with global trade rules. In other words, CBAM may be viewed as a tool through which the European Union “regulates the behavior of trading partners” via environmental policy, producing indirect binding effects on the production structures and industrial standards of countries outside its jurisdiction.

CBAM is primarily designed to address the issue of carbon leakage, which arises when businesses relocate production to countries with lower environmental standards in order to avoid the costs associated with stricter greenhouse gas reduction measures domestically. Accordingly, the EU’s implementation of CBAM aims to preserve the competitiveness of EU producers while simultaneously compelling foreign producers to transition toward a low-carbon economy.

From a structural perspective, carbon leakage is not merely an environmental issue but reflects an “imbalance of regulatory frameworks” among states with differing levels of regulatory stringency. Specifically, when one state imposes strict environmental measures—such as carbon pricing or emission caps—its production costs inevitably increase, thereby incentivizing businesses to shift operations to jurisdictions with more lenient regulations. In practice, this may result in a “relocation of carbon emissions” rather than an actual reduction of emissions.

For this reason, CBAM is designed to function as a “cost equalization mechanism” between domestic and foreign producers. It extends carbon costs—previously confined within the EU—into market access conditions. In other words, even if producers are located in countries without carbon pricing mechanisms, once their goods are exported into the EU market, such carbon costs will inevitably be calculated and imposed through the CBAM system.

Thus, this mechanism effectively transforms carbon costs into a “quasi-global carbon cost” through trade instruments.

In another dimension, CBAM reflects the EU’s effort to maintain the stability of its internal policies, particularly the EU Emissions Trading System (EU ETS). Without CBAM, EU producers would risk losing competitiveness to imported goods that do not bear equivalent carbon costs, potentially leading to reduced investment within the region and undermining the effectiveness of climate policies.

Furthermore, CBAM carries significant implications in international policy, as it sends a structural signal to trading partners that environmental standards are no longer merely domestic requirements but have become conditions for global market access. Consequently, exporting countries are compelled to adjust their laws, policies, and industrial structures to align with a low-carbon economy, or otherwise face increased costs and market risks.

Accordingly, CBAM does not merely function to prevent carbon leakage but also operates as a strategic instrument through which the EU “regulates the behavior of foreign producers” via market and trade mechanisms. In practice, this may be comparable to an expansion of environmental legal standards into the international sphere.

Ultimately, understanding CBAM in the context of carbon leakage requires a comprehensive analysis—as a mechanism addressing market failure, as a tool for protecting domestic competitiveness, and simultaneously as a source of legal controversy in international trade law.

Mechanism of CBAM

In operational terms, CBAM requires that imported goods reflect greenhouse gas emission costs at levels comparable to those of goods produced within the EU.

Importers are required to:

• report embedded carbon emissions in their goods; and
• purchase CBAM certificates corresponding to such emissions

The price of these certificates is linked to carbon prices under the EU ETS.

Accordingly, the cost structure of goods is no longer determined solely by traditional factors such as raw materials, labor, or logistics, but also includes environmental costs converted into tangible economic costs.

From a regulatory economics perspective, this reflects the “internalization of externalities”, whereby greenhouse gas emissions—previously unpriced—are quantified and transformed into measurable and chargeable costs.

As a result:

• global pricing structures begin to reflect the true cost of environmental resources; and
• CBAM serves as a price signal encouraging producers worldwide to transition toward low-carbon production.

Initially, CBAM covers basic industrial sectors such as:

• steel
• aluminum
• cement
• fertilizers
• electricity
• hydrogen

However, its scope is expected to expand to energy-intensive sectors, including:

• oil refining
• petrochemicals
• plastics

These sectors are critically important to Thailand’s economy, and such expansion will significantly impact Thai businesses in terms of cost structures and competitiveness in the EU market.

Impact on Industry

From an industrial perspective, CBAM transforms carbon cost into a primary determinant of competitiveness, particularly in energy-intensive industries such as refining and petrochemicals.

This may lead to:

• restructuring of investments
• relocation of production bases
• acceleration of clean technology development

Data from the Stock Exchange of Thailand indicates that CBAM may affect Thai exports at a scale of tens of billions of baht, reflecting macroeconomic impacts.

However, the impact extends beyond export value to structural changes in supply chains, as EU buyers increasingly impose new criteria, including:

• carbon disclosure capability
• production transparency
• ESG compliance

In practice, carbon data becomes a commercial element equivalent to product quality and price. Producers unable to provide reliable emissions data or verification may be excluded from supply chains.

This reflects a transition toward a “carbon-aware supply chain”.

Impact on Energy Sector

For the energy and oil industries, CBAM has particularly severe and complex impacts, as these industries involve high emissions throughout the entire value chain:

• upstream (exploration and production)
• midstream (transportation)
• downstream (refining and end-use)

Thus, CBAM increases costs both:

• directly (carbon costs), and
• indirectly (compliance and reporting costs)

Moreover, due to global value chain complexity, carbon footprint calculations must cover both upstream and downstream activities, requiring:

• advanced data management systems
• internal verification mechanisms
• risk management for volatile EU ETS carbon prices

International Trade Law Perspective

CBAM has generated extensive debate under the framework of the World Trade Organization (WTO), particularly regarding potential inconsistencies with:

• the Most-Favoured-Nation (MFN) principle
• the National Treatment principle

However, the EU is likely to justify CBAM under GATT Article XX environmental exceptions.

Nevertheless, invoking Article XX requires passing strict legal tests, including:

• necessity
• proportionality

The EU must demonstrate that:

• CBAM is necessary to achieve environmental objectives; and
• no less trade-restrictive alternatives are available

Additionally, the measure must not constitute:

• arbitrary or unjustifiable discrimination; or
• disguised restriction on international trade

(as required under the chapeau of Article XX)

A further key issue concerns whether imposing carbon costs on imports produced outside the EU constitutes an extraterritorial extension of jurisdiction.

This raises broader conceptual debates regarding the scope of state authority in regulating environmental standards through trade mechanisms. CBAM may therefore be viewed as a form of regulatory extraterritoriality in practice.

Contractual Implications

At the transactional level, CBAM directly impacts the structure of commercial contracts, particularly long-term agreements in energy and commodities sectors.

Key considerations include:

• allocation of carbon costs between parties
• price adjustment mechanisms
• treatment of CBAM as a change in law

Conclusion

In practice, international commercial contracts will inevitably incorporate carbon-related clauses, including:

• cost-sharing mechanisms
• carbon-linked pricing
• renegotiation rights

This reflects a fundamental shift whereby environmental considerations have become binding contractual elements, rather than merely policy or CSR concerns.

Disclaimer

This article is prepared for the purpose of providing general legal information only and does not constitute specific legal advice. Readers are advised to consult qualified professionals prior to relying on the content herein. The dissemination of this article does not create a lawyer-client relationship. All rights are reserved under the Copyright Act B.E. 2537 (1994).

Author: Pinprapus Chartikavanich
Date: 23 March 2026