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CBAM – Carbon Border Adjustment Mechanism

Carbon Border Adjustment Mechanism (CBAM) is a groundbreaking regulatory framework introduced by the European Union (EU) to address the pressing issue of carbon leakage and promote fair economic competition between industrial sectors operating both within and outside the EU. In this glossary article, we provide a detailed examination of CBAM, its purpose, functioning, and global significance in mitigating climate change.

What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM), introduced under EU Regulation 2023/956, is a unique policy instrument designed to impose carbon pricing on imports of specific products into the EU. CBAM ensures that imported products are subject to the same carbon pricing as products manufactured within the EU under the Emissions Trading System (ETS). In this way, CBAM prevents the relocation of production to regions with less stringent climate policies – a phenomenon known as carbon leakage.

This mechanism is a key component of the EU’s ambitious climate strategy under the European Green Deal, which aims to make Europe the first climate-neutral continent by 2050. CBAM not only supports the EU’s climate objectives but also encourages global adoption of carbon pricing mechanisms.

Legal Basis of CBAM

CBAM is legally grounded in the “Fit for 55” legislative package, which aligns EU policies with the goal of reducing greenhouse gas emissions by 55%25 by 2030 compared to 1990 levels. The mechanism is consistent with World Trade Organization (WTO) rules, ensuring its compatibility with international trade law.

How Does CBAM Work?

CBAM operates through a structured and gradual approach focused on imports of carbon-intensive products. The mechanism requires importers to take the following steps:

  1. Calculation of embedded emissions: Importers must measure or report greenhouse gas (GHG) emissions embedded in the production of their imported products. This includes emissions from raw material extraction, production, and transportation.
  2. Purchase of CBAM certificates: Importers are required to purchase CBAM certificates proportional to the embedded emissions in their products. The price of these certificates is based on the average weekly price of EU ETS allowances (€/t CO2).
  3. Adjustment for carbon pricing in exporting countries: If the exporting country already implements a carbon pricing mechanism, costs paid at the place of origin are deducted from the CBAM obligation to avoid double taxation.

Why is CBAM Important?

CBAM addresses several key challenges in combating climate change and pursuing economic fairness:

  • Prevention of carbon leakage: By ensuring that imports bear the same carbon costs as domestic products, CBAM discourages industry from relocating to countries with milder climate policies.
  • Support for fair competition: The mechanism protects EU industrial sectors from unfair competition from cheaper, carbon-intensive imports.
  • Support for global climate action: CBAM motivates countries outside the EU to adopt robust climate policies and implement carbon pricing mechanisms.
  • Support for EU climate goals: CBAM is aligned with the EU’s commitment to carbon neutrality and contributes to reducing global greenhouse gas emissions.

Goods Covered by CBAM

CBAM initially focuses on carbon-intensive products that are most at risk of carbon leakage. These include:

  • Cement
  • Iron and steel
  • Aluminum
  • Fertilizers
  • Electricity
  • Hydrogen

As the mechanism develops, its scope may expand to include additional products and sectors, increasing its impact on global emissions reduction.

CBAM Implementation Phases

1. Transitional Phase (2023-2025)

During this phase, importers are required to report embedded emissions in their imports without having to purchase CBAM certificates. This pilot phase allows stakeholders to refine methodologies and develop systems for ensuring compliance.

2. Definitive Regime (from 2026)

From 2026 onwards, CBAM will be fully operational. Importers will be required to purchase and submit CBAM certificates corresponding to the embedded emissions in their imports.

CBAM and the EU Emissions Trading System (ETS)

CBAM is designed to complement the EU ETS, the world’s largest carbon market. The ETS limits total greenhouse gas emissions in specific sectors and requires companies to purchase allowances for their emissions. With the gradual phase-out of free allowances under the ETS, CBAM ensures that imports are subject to equivalent carbon costs, maintaining a level playing field.

CBAM vs. Carbon Tariffs

Although CBAM is often compared to carbon tariffs, it differs in its design and operation. Unlike tariffs, CBAM adjusts carbon prices already paid in the country of origin, ensuring fairness and preventing double taxation.

Global Significance of CBAM

CBAM is aligned with international climate agreements, including the Paris Agreement, which aims to limit global warming to 1.5°C above pre-industrial levels. By setting this example, the EU encourages other nations to adopt robust climate policies and incorporate carbon pricing into their economies.

Challenges and Criticism

Despite its potential, CBAM faces several challenges:

  • Complexity of emissions calculation: Measuring embedded emissions across global supply chains is technically challenging.
  • Trade disputes: CBAM could provoke resistance from trading partners, particularly developing countries, which may perceive it as a protectionist measure.
  • Fairness concerns: Developing countries argue that CBAM disproportionately affects them because they lack the resources to implement comparable climate policies.

Future of CBAM

The success of CBAM depends on several factors:

  1. Global cooperation: Encouraging international partners to adopt compatible climate policies.
  2. Expansion of scope: Including more products and sectors to increase impact.
  3. Technological progress: Improving methods for calculating embedded emissions.

By 2030, CBAM is expected to make a significant contribution to the EU’s climate strategy, transform global trade, and accelerate the transition to a low-carbon economy.

The Carbon Border Adjustment Mechanism (CBAM) is a pioneering policy that underscores the EU’s leading position in climate action. By addressing carbon leakage, promoting fair competition, and encouraging global climate policies, CBAM represents an important step towards a more sustainable and equitable future. However, success requires careful implementation, global cooperation, and a commitment to fairness and inclusivity.