The Carbon Border Adjustment Mechanism (CBAM) is a policy tool introduced by the European Union (EU) to address climate change and prevent carbon leakage. It is part of the EU’s broader European Green Deal, which aims to make Europe the first climate-neutral continent by 2050.
Key Points about CBAM:
- Purpose:
- Prevent Carbon Leakage: Carbon leakage occurs when companies move their production to countries with less stringent climate policies, leading to an overall increase in global emissions. CBAM aims to prevent this by leveling the playing field between EU producers and foreign companies.
- Encourage Global Climate Action: By imposing a carbon price on imported goods, CBAM encourages countries outside the EU to adopt more stringent environmental regulations.
- Scope:
- CBAM initially targets sectors with high carbon emissions and a significant risk of carbon leakage, such as cement, iron and steel, aluminum, fertilizers, and electricity. It is expected to expand to other sectors over time.
- Mechanism:
- Carbon Pricing: The CBAM imposes a charge on imports into the EU based on the carbon emissions associated with their production. The charge is aligned with the carbon price established by the EU’s Emissions Trading System (ETS).
- Certificates: Importers must buy CBAM certificates equivalent to the embedded carbon in their goods. The price of these certificates is linked to the prevailing price of carbon allowances under the EU ETS.
- Implementation Timeline:
- Transitional Phase (2023-2025): During this period, companies are required to report the carbon emissions embedded in their products but do not have to pay the CBAM charges.
- Full Implementation (2026 Onward): Importers will need to start purchasing and surrendering CBAM certificates, reflecting the carbon price that would have been paid if the goods had been produced in the EU.
Strategic Impact:
For businesses exporting to the EU, CBAM means adapting to new regulations, potential cost increases, and changes in supply chain strategies. The mechanism encourages global companies to reduce their carbon footprints to maintain competitiveness in the EU market.
By holding importers accountable for carbon emissions, CBAM aligns economic activities with global climate goals, promoting a transition to low-carbon production practices worldwide.
