Middle East adjusts to key new European climate policy

January has been a fast-paced, high-profile start to 2026, with events including the unseating of former Venezuela president Nicolas Maduro from power by the US. Much more under the global radar screen, however, has been the flexing of the EU’s muscles as a global regulatory power with the full introduction of the Carbon Border Adjustment Mechanism.

CBAM will have significant implications for the Middle East and Africa, plus the wider world outside of the EU. For instance, the UAE, Bahrain, and Egypt are among the top ten exporters of aluminum to the EU; for fertilizers, it is Morocco, Egypt, and Algeria.

However, Turkiye may be the most impacted nation in the region. The country is an important supplier of iron and steel, cement, and aluminum for the EU, and the bloc is Turkey’s biggest trading partner.

This was highlighted in the European Commission’s initial operational figures following CBAM’s entry into force on Jan. 1. By Jan. 7, over 10,000 CBAM-related import customs declarations were validated automatically through integrated systems; between Jan. 1-6, CBAM covered 1.66 million tonnes of imports, 98 percent of which were iron and steel, mainly originating from Turkiye, China and India. This early data underlines that countries that export high-carbon industrial products such as steel, iron, aluminum, cement, and fertilizers will be most impacted.

CBAM is only the latest example of the EU’s attempts to try to set the global regulatory agenda in what has been called the “Brussels effect”. That is, that by developing far-reaching regulations that have a significant bearing on the international landscape outside of the continent, including in the Middle East, the EU is trying to ensure that European values shape policy beyond its borders.

The EU’s big push forward with CBAM sees the 27 member EU adopting the world’s first fully operational border carbon adjustment policy to begin charging costs based on the emissions intensity of imported goods. It is the first time that the price of carbon in a defined jurisdiction, in this case Europe, will be externalized beyond borders to try to encourage cleaner industrial production in non-EU countries, including in the Middle East.

CBAM is only the latest example of the EU’s attempts to try to set the global regulatory agenda in what has been called the “Brussels effect”

Andrew Hammond

In response, companies, particularly in high-emissions, export-intensive sectors, have been rapidly preparing for CBAM. The EU regulation establishing CBAM originally came into force in 2023 with a transition phase which ran until last December. This gradual introduction is aligned with the phase-out of free allowances under the EU Emissions Trading System, the world’s first international emissions trading system established in 2005, to support decarbonization of European industry.

Since Jan. 1, with CBAM fully applied, a levy equivalent to the emissions produced in the manufacturing process of the imported products is required in the form of purchasing CBAM certificates. As part of this process, EU importers or their indirect customs representatives importing more than the single mass-based threshold of 50 tonnes of CBAM goods into the EU now have to apply for the status of authorized CBAM declarants. 

They buy CBAM certificates from national authorities in their EU country of establishment. The price of the certificates is calculated based on the auction price of EU ETS allowances expressed in euros/tonne of CO2 emitted, as a quarterly average in 2026 and as a weekly average from 2027 onwards.

EU importers also now declare emissions embedded in their imports and surrender the corresponding number of certificates each year. If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.

The primary goal is to prevent so-called carbon leakage which is the phenomenon whereby stricter climate policies in one power — in this case the EU — lead to an increase in greenhouse gas emissions in another power, such as Turkiye, often due to the relocation of emissions-intensive industries.

The transition period from 2023 to 2025 has served at least three purposes for the EU. Firstly, allowing for impacted firms to prepare for CBAM; secondly, giving time for negotiations with non-EU countries, including in the Middle East; and thirdly, allowing the EU to finalize detailed regulations, with the last major communication on Dec. 17.

That important CBAM announcement includes clearer operational rules, new documents covering calculation methodologies, default values, and verification. The package also reinforces enforcement, closes circumvention loopholes, and introduces targeted extensions and support measures, as well as providing further implementation clarity.

Specific measures include extension of CBAM to downstream products, addressing carbon leakage risks further down the value chain with proposals to extend CBAM to a defined set of steel and aluminum-intensive downstream products.

The extension covers around 180 product categories, mainly industrial supply-chain goods with high steel or aluminum content, alongside a limited number of household appliances. For these downstream goods, CBAM will apply only to the emissions embedded in CBAM-covered input materials, not to downstream manufacturing processes.

The extension is not a big surprise. While CBAM initially applied to imports of certain goods and selected precursors whose production is heavily carbon-intensive and at most significant risk of carbon leakage, it will ultimately seek to capture more than 50 percent of the emissions in ETS covered sectors. 

Building on lessons from the CBAM transition period, the Commission has also strengthened its ability to address circumvention risks. New measures include enhanced reporting requirements to improve traceability of CBAM goods, clearer treatment of emission-intensity mis-declarations, and the inclusion of pre-consumer steel and aluminum scrap in CBAM calculations.

Taken together, with the CBAM kicking fully into effect, an increasing number of firms in the Middle East and beyond are adapting. It will be a significant test, especially for small and medium-sized exporters, given the new burdens on them. 

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.