The Carbon Border Adjustment Mechanism (CBAM), or Carbon Border Adjustment Mechanism (MACF), is an EU initiative to set a fair price for carbon emitted during the manufacture of high-carbon goods imported into the EU, while encouraging cleaner industrial production in countries outside the EU. By requiring payment for carbon emissions associated with certain imported goods, CBAM ensures that the carbon cost of imports is in line with that of Union production, thus maintaining the EU's climate goals.
The EU is committed to achieving carbon neutrality by 2050, in particular through the Green Deal, which aims at sustainable growth with measures such as the revision of the Emissions Trading System (EU ETS), improving energy efficiency and supporting renewable energies. CBAM is following this trend by ensuring that EU efforts are not undermined by unfair trade practices, and encourages other regions to adopt similar climate policies. It will also serve to prevent carbon leakage, i.e. the relocation of industrial production to regions with less stringent climate policies to avoid regulatory costs.
The CBAM entered into a transitional phase in October 2023. During this phase, some imported goods with a high carbon footprint are subject to emissions declarations without the need to buy certificates. Importers have the choice between three reporting methods until 2024. From 2025, only EU methods will be accepted and several sectors will be concerned (cement, iron, steel, aluminium, fertilisers, electricity and hydrogen). The scope will gradually be expanded to include other sectors and products. Starting in 2026, importers will need to buy certificates to offset the emissions embedded in their imports, which will encourage a reduction in emissions globally. If the country of origin has already implemented a carbon tax, importers will be able to deduct these costs from the amount to be paid under the CBAM, in order to avoid double taxation.
CBAM stimulates green innovation, which promotes the development of clean technologies, and increases long-term competitiveness. By setting a strict standard for carbon emissions, the EU is indirectly pushing other regions to strengthen their own climate policies. Countries exporting to the EU could be encouraged to adopt similar measures to avoid tariff adjustments and remain competitive. Moreover, this approach could promote global convergence towards stronger environmental regulations, thus amplifying international efforts. However, by imposing carbon taxes, the EU is accused by some of its partners of creating disguised trade barriers that potentially violate the rules of the World Trade Organization (WTO). This perception of green protectionism could complicate trade and international relationships. Additionally, EU partners, especially developing countries, have expressed concerns about the economic impacts of CBAM.
For example, Russia was the main exporter to the EU of goods covered by the CBAM from 2015 to 2019, followed by China, the United Kingdom and Turkey. Imports of iron, steel, and aluminum were the most important for the EU, with Russia also providing plenty of fertilizer. Among other exporters, 80% of the United Kingdom's exports of CBAM goods go to the EU, compared to 78% for Serbia and 76% for Mozambique, which depends on exporting its aluminium to the EU. This country could be seriously affected due to the use of coal in its production and will not be the only country in need of financial assistance to adopt cleaner alternatives, otherwise the new EU regulations could worsen its economic difficulties. In addition, the exemption of recycled products, such as steel and aluminum, may lead to opportunistic behaviors: manufacturers could generate more waste to “recycle” it and thus avoid the tax. Finally, importers could pass on the additional costs to end consumers, increasing prices in Europe without necessarily reducing global emissions.
Image Credit: World Cement Association