Carbon Border Adjustment at the Definitive Stage: Exposure Channels, Domestic Carbon Pricing and Green Finance Architecture in Azerbaijan

Abstract

The European Union’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on 1 January 2026, converting an instrument of climate policy into an operative condition of market access. This paper examines what that transition means for a small, hydrocarbon-dependent open economy that is simultaneously attempting to diversify its industrial exports and to position itself as a supplier of renewable electricity to the European market. Using documentary analysis of the CBAM legal framework together with scenario-based sensitivity estimates, the study maps Azerbaijan’s exposure across four transmission channels: products already within scope (aluminium, iron and steel, fertilisers), electricity exports planned through the Black Sea submarine interconnector, transit and supply-chain effects associated with the Trans-Caspian corridor, and the prospective downstream extension of the mechanism from 2028. Three findings emerge. First, the financial burden of 2026 is negligible because only 2.5 per cent of embedded emissions attract a certificate obligation in the first year; the binding constraint is instead the absence of verified installation-level emissions data, which triggers conservative country-specific default values carrying a mark-up that rises from 10 per cent in 2026 to 30 per cent in 2028. Second, because a documented domestic carbon price is deductible from the CBAM liability, the policy question is not whether the carbon cost is paid but to whose budget it accrues; the paper shows, however, that this rent-capture logic only becomes fiscally advantageous once the phase-in factor is high, and quantifies the threshold. Third, drawing on recent panel evidence, the paper argues that the binding constraint on green investment in Azerbaijan is the architecture of green finance rather than the volume of fiscal expenditure. An eight-point policy framework and a sequencing timetable are proposed.