Confused about the EU Carbon Border Adjustment Mechanism? We tell you everything you need to know in this article.
(Edit: this article has now been updated in our 2023 version: How the EU’s Carbon Border Adjustment Mechanism – CBAM is Evolving)
In a bid to accelerate European decarbonisation and meet the EU’s target to cut emissions by 55% in 2030 compared to 1990 levels, the European Commission has proposed several measures to incentivize producers to pollute less and remain on EU soil. One of them is the Carbon Border Adjustment Mechanism, which would place a carbon tariff on electricity, cement, aluminium, fertilizer and iron and steel products imported from outside the EU, thus leveling the playing field for European producers and avoiding “carbon leakage”.
How would it be priced?
The price of the tariff would depend on the amount of emissions generated by the product and on the price difference between carbon in the EU and in the country or region the product comes from. It would be paid by EU importers of non-EU products.
It is initially focused on direct emissions from production (scope 1), but could be extended to scopes 2 and 3 after a transition period.
When would it be implemented?
The Carbon Border Adjustment Mechanism would come into force in 2026 after a three-year transition (but proposed changes would move this date forward to 2025). The implementation of this mechanism would coincide with the phasing out of free allowances under the EU ETS, meaning that EU polluters would be forced to truly reduce or offset emissions, since moving production elsewhere would not spare them from the carbon price.
Who would be most impacted?
Within the EU, Bulgaria, Ireland and Greece are the countries most reliant on non-EU imports in sectors included in the mechanism: if it were implemented today, more than 50% of their imports would be subjected to the tariff. In Spain, this number would be close to 40%.
Research suggests that the majority of products included in the Carbon Border Adjustment Mechanism come from Russia, Turkey, the UK and China. Countries that have their own carbon price in place could be partially exempted from the mechanism, as importers would be able to deduct the exporting country’s carbon tax from the EU tariff. These include the UK, China and South Korea, though the level of exemption would depend on the carbon tax in place and the sectors covered.
What has been the global reaction?
Several countries have criticized the EU proposal, including Russia, India, Brazil and China, and some have threatened to denounce it to the World Trade Organization, which could lead to litigation. Some European industry groups have argued that the legislation would undermine the competitiveness of EU companies.
The proposal was announced in July 2021, and is currently being debated at the European Parliament. Interestingly, the proposed changes would make the Carbon Border Adjustment Mechanism more radical, with an earlier implementation date and more products included in the scheme. The proposal now has to be debated among member states.
How can ClimateTrade help?
As a European-based blockchain marketplace for climate, ClimateTrade is deeply connected with the EU carbon market. Contact our team if you need help to understand how this measure would affect your company.
