What you need to know about CBAM

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a significant policy tool aimed at addressing carbon leakage and promoting global decarbonization efforts. Introduced by the European Commission as part of the European Green Deal, CBAM operates by imposing a carbon price on imports, based on their carbon footprint, thereby aligning international trade with EU climate objectives.

Purpose of CBAM

CBAM seeks to level the playing field for industries by ensuring that imported goods are subject to the same carbon pricing as goods produced in EU. This should help prevent carbon leakage, where industries relocate to regions with weaker climate policies and lower environmental standards to avoid higher costs associated with carbon emissions. The objective of CBAM is to contribute to the EU’s climate neutrality goals and encourage partner countries to decarbonize their production processes, leveling the playing field in carbon pricing competition between EU producers and others.

How it works

So far, the EU has mitigated this risk through free allocations to specific sectors, but with growing climate ambitions and higher carbon prices, the Commission is seeking to gradually phase out these free allocations.

Starting from 2023, we are witnessing a transitional period, during which importers report emissions through a monitoring, reporting, and verification system to ensure accurate carbon footprint reporting. The introduction of this new adjustment mechanism, starting in 2026, will require EU importers to purchase certificates equivalent to the EU’s weekly carbon price.

CBAM will initially be applied to imports of five high-emission-intensive sectors, considered at higher risk of carbon emissions relocation, such as:

• Steel
• Aluminum
• Cement
• Electricity
• Fertilizers
• Polymers
• Chemical products

Meanwhile, other sectors deemed high-risk for carbon leakage will be evaluated, based on the data collected during the initial implementation. This proposal would then require approval by the European Parliament and Council.

Challenges and Considerations

Despite its benefits, CBAM faces certain challenges, particularly in terms of implementation complexity, potential trade disputes, and impact on developing countries.

Implementing the border adjustment mechanism requires sophisticated monitoring, reporting, and verification systems, necessitating precise measurement of carbon footprints across diverse industries and regions. This is a complex and resource-intensive endeavor associated with different products and production methods. Additionally, ensuring consistency and fairness in carbon measurements across borders adds further complexity, as methodologies must be standardized and harmonized to enable the effective implementation of the mechanism.

Another aspect to consider is the impact of CBAM on developing countries, especially for those regions heavily reliant on exports, which has significant implications for economic development and global competitiveness. Many developing countries rely on exporting textiles, agricultural products, and raw materials to sustain their economies. These sectors often have higher carbon footprints due to limited access to clean technologies or lax environmental regulations. In these cases, CBAM could raise export costs for developing countries selling goods to markets with carbon pricing, reducing their competitiveness and potentially lowering export volumes and revenues.

Despite these challenges, CBAM could attract green investments and cleaner technologies to developing countries aligned with international climate goals, positioning them as attractive destinations for sustainable development assistance.

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