Recognizing Third-Country Carbon Prices Under the European CBAM: Options to Close the Price Gap

Carolyn Fischer and Michael Mehling

June 2026

Article 9 of the EU Carbon Border Adjustment Mechanism (CBAM) Regulation allows importers to deduct carbon prices effectively paid in a country of origin from their CBAM certificate obligation. How that deduction is implemented will shape not only the distribution of compliance costs and revenues, but also the CBAM’s broader ability to catalyze carbon pricing abroad. This research commentary argues that the European Commission’s May 2026 draft implementing regulation adopts a defensible architecture by recognizing actual monetary carbon costs, limiting reliance on international credits, and requiring a binding domestic compliance regime. Yet it is more restrictive than necessary in how it limits third countries from closing the gap between domestic carbon prices and the EU ETS-linked CBAM certificate price. Because the CBAM was designed as a leakage safeguard rather than a revenue-raising instrument, enabling trade partners to retain rents domestically is politically, legally, and normatively desirable, especially in light of differentiation and climate finance principles under the Paris Agreement. The commentary develops three options for a workable compromise: recapturing free allocation or other compensation for exports, allowing top-up purchases of eligible credits, and permitting additional domestic tax or allowance payments. It also argues for a potential derogation benefitting least developed countries. Targeted refinements to the implementing regulation could preserve environmental integrity and leakage protection while enhancing fairness and international acceptability.