The growing policy divide between the US and EU on carbon accountability, driven by CBAM's emissions regulations and the new US administration's deregulatory stance, is forcing US businesses to navigate compliance challenges on their own, unlocking demand for digital innovations that solve the carbon accounting challenge.

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Introduction

For many years now, the United States and the European Union have taken distinct—though not entirely opposing—approaches to carbon policy. The EU has wielded an increasingly weighty stick, introducing a dense thicket of regulations, carbon pricing mechanisms, and restrictions to enforce emissions reductions. The US, by contrast, has favored ever-juicier carrots, using tax incentives, grants, and voluntary programs to encourage businesses to decarbonize at an accelerated pace.

In just a few days of taking office, the new US administration has abruptly changed course by canceling its support for decarbonization, setting up a potential confrontation between the two trading blocs.

CBAM — The Carbon Equalizer

The European Union's Carbon Border Adjustment Mechanism (CBAM) is a prime example of the EU's regulatory stick. It is designed to prevent carbon leakage—carbon-intense European industries shifting production outside the EU to where regulations are more lax—by imposing a carbon price on imports. CBAM initially targets steel, cement, aluminum, fertilizers, electricity, and hydrogen imports, but could eventually encompass petroleum products, industrial chemicals, and consumer goods.

CBAM represents a significant advance in how global trade is managed. Its goal is to ensure that EU-based industries, already subject to emissions costs under the EU's Emissions Trading System (ETS), are not undercut by imports from countries with weaker climate policies. In effect, CBAM levels the carbon playing field, holding foreign manufacturers equally accountable for their emissions.

For US exporters, CBAM presents significant challenges. American businesses exporting to the EU, particularly in steel, aluminum, and fertilizer, are now required to measure, track, and report emissions across their full supply chains—something many are ill-prepared to do. Without matching federal carbon pricing or emissions mandates in the US, companies exporting to Europe must go it alone.

US Environmental Policy Shifts

While the EU is doubling down on emissions accountability, the US under Trump is moving in the opposite direction. The new administration has already paused funding for key provisions of the Inflation Reduction Act (IRA), including hydrogen projects, and halted permitting for selected offshore wind energy. These moves have been justified by claims that environmental regulations hurt American consumers and weaken America's global leadership.

The new administration may not stop deregulation. Trump has repeatedly threatened to impose tariffs on Canada and Mexico to control the flow of migrants, stem the flood of drugs crossing borders, and secure compensation for reliance on the US dollar as the global settlement currency. With other countries (India, China) framing CBAM as a protective measure, the US may respond with retaliatory tariffs on European goods, further escalating trade tensions. Trump has already highlighted how various EU member nations consistently fall short of their NATO funding targets and may use tariffs to make up the funding gaps.

A key question is whether Trump's push for deregulation will give US manufacturers a competitive advantage by reducing their costs or a competitive disadvantage in a world that increasingly values low-carbon products. In the short term, US firms may enjoy lower compliance costs than their European counterparts, enabling them to undercut EU competitors in some markets. However, if global consumers and investors continue to prioritize sustainability, US businesses may find themselves excluded from premium markets. The real challenge for US businesses will be navigating this fragmented trade environment without being locked into the wrong side of history.

The Price of a Policy Gap

CBAM was designed under the assumption that global markets would continue shifting toward carbon pricing. The US, under Biden, was on a parallel path, making transatlantic alignment on climate policy seem inevitable. But with Trump rolling back key environmental policies, this assumption is breaking down. If the US embraces a high-carbon industrial strategy, does CBAM go far enough or has it gone too far? European policymakers may now feel pressure to expand CBAM's scope to additional US exports, such as petroleum-based products, chemicals, or even manufactured goods, to prevent high-carbon imports from gaining a competitive foothold in the EU market. This would mark a significant escalation, turning CBAM into a broader tool for economic leverage rather than just an emissions accounting mechanism.

With no alternative framework to replace the mechanisms embodied in the IRA, US companies now face this wider policy gap with the EU. Exporters of carbon-intensive products will struggle to meet CBAM standards, and those companies that had begun to pivot toward cleaner technologies may lose momentum.

The US federal shift in priorities also undermines state-level efforts to combat climate change. States like California and Washington, which have put in place cap-and-trade programs and other regulatory tools, now find themselves dramatically out of step with federal policy.

Market Forces May Prevail

The EU has positioned itself as the global leader in climate-conscious trade, but this leadership comes with risks. If CBAM raises production costs too much without bringing other major economies into alignment, European manufacturers could become less competitive against their US and Chinese counterparts. There is already debate within the EU about whether CBAM could hurt European industry more than its competitors. If European firms start seeing US companies capturing more global market share, pressure may mount for policymakers to adjust CBAM's timeline, expand exemptions, or provide financial support for EU industries struggling to compete.

Even as the Trump administration dismantles federal climate policies, market forces aren't going away. Consumer demand for sustainable products continues to rise, and investors are still pressuring companies to meet ESG targets. Many large corporations—including those in CBAM-affected industries—are already committed to net-zero strategies because of shareholder expectations and global supply chain requirements. At the same time, Democratic-led states like California, Washington, and New York will continue enforcing their own strict carbon regulations, creating a fragmented regulatory landscape where businesses must comply with state-level rules even as federal oversight weakens. This leaves US firms in a complex position: they must balance deregulation-driven cost savings with the need to maintain sustainability credentials in markets that demand it.

If the US moves toward a high-carbon, deregulated industrial policy while the EU doubles down on carbon pricing and trade-linked emissions rules, global trade could fracture into two distinct economic blocs—one aligned with low-carbon trade policies, and another where carbon remains an afterthought. This shift could strengthen trade ties between Europe and economies that commit to carbon pricing (such as Canada, Japan, and potentially India), while pushing the US into closer alignment with China and other fossil-fuel-heavy economies. This is the bigger picture beyond CBAM—whether climate policy becomes a new trade battleground, influencing how alliances and supply chains evolve over the next decade.

Digital Solutions to Policy Gaps

As the US steps back from climate accountability, American exporters intent on maintaining access to the attractive EU market urgently need to find solutions that enable them to quickly navigate CBAM and other related standards. Digital technology offers a convenient pathway for companies to measure, track, verify, and report emissions very efficiently, minimizing the compliance burden.

The incoming administration's pro-technology stance is particularly promising for businesses seeking innovative compliance tools. Recent executive orders promoting blockchain, AI, and digital financial systems suggest that the federal government is open to leveraging digital innovation to boost US competitiveness.

Blockchain-based emissions tracking platforms, for example, can provide tamper-proof records of carbon intensity, allowing companies to prove compliance with CBAM without relying on outdated or manual reporting systems. Similarly, AI-driven tools can analyze supply chain emissions, identify inefficiencies, and suggest mechanisms for decarbonization.

Conclusions

The policy divergence between the US and EU on carbon accountability is more than a regulatory discrepancy—it's a battleground for global trade norms and industrial competitiveness. The decisions made now—by policymakers, businesses, and innovators—will shape the future of carbon accountability, global trade, and industrial competitiveness for years to come.

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