Understanding the EU Carbon Border Adjustment Mechanism (CBAM)
The Carbon Border Adjustment Mechanism (CBAM) is a key component of the European Union's climate strategy, designed to combat carbon leakage and promote global decarbonization. Introduced as part of the European Green Deal and 'Fit for 55' package, CBAM aims to level the playing field between EU producers and importers by imposing a carbon price on certain imported goods, reflecting their carbon content. The mechanism entered its transitional phase on October 1, 2023, with full implementation expected by 2026.
Key Features of CBAM
- Applies to carbon-intensive sectors: cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen
- Requires importers to report embedded emissions in goods quarterly during the transitional phase
- Will replace free allowances under the EU Emissions Trading System (ETS)
- Aims to encourage global partners to implement stronger climate policies
- Designed to be WTO-compatible and gradually phased in to allow adaptation
Impact and Implications
CBAM represents a significant shift in global climate policy, potentially influencing international trade patterns and encouraging the adoption of cleaner production methods worldwide. For businesses, it necessitates a thorough understanding of supply chain emissions and may require adjustments to remain competitive in the EU market. As the first carbon border tax of its kind, CBAM could set a precedent for similar measures globally, potentially reshaping international efforts to combat climate change.