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On May 10, the European Commission and co-legislators signed the Carbon Border Adjustment Mechanism (CBAM), marking a significant stride in the global fight against climate change. As of October 1, this mechanism requires certain goods to report carbon emissions.

Understanding CBAM

The Carbon Border Adjustment Mechanism is an initiative by the EU to reduce the global carbon footprint and encourage more sustainable industrial practices. From 2026, importers must purchase carbon certificates equivalent to the carbon price payable if the product has been manufactured within the continent. This policy aims to create an even playing field for EU-made products and imports, spurring producers outside the EU to adopt greener manufacturing processes.

A Protection Against Unfair Climate Policies

The CBAM serves as a safeguard for EU industries against competitors from countries with more lax climate policies. This strategy, sometimes termed a carbon tax or carbon tariff, implies that the price of goods imported into the EU will mirror the cost of carbon emissions related to their production.

If a non-EU country maintains lower carbon prices, the EU might impose a CBAM to ensure that imported goods carry the exact domestic carbon cost. This is a countermeasure against “carbon leakage,” a phenomenon where businesses relocate their production to countries with less stringent emission controls.

The European Green Deal

As part of its broader European Green Deal framework, the EU plans to achieve climate neutrality by 2050. The CBAM is a pivotal element in this initiative, ensuring fair competition for businesses within and outside the EU and holding all accountable for their carbon emissions.

What Did the EU Have Before CBAM?

Before the CBAM, the EU managed emissions through the EU Emissions Trading System (ETS). This system limited the volume of greenhouse gases that specific industrial installations could emit. Certain allowances were granted for free to prevent carbon leakage under this system.

The International Concerns Over CBAM

Initially, CBAM will apply to carbon-intensive goods and selected precursors. However, over time, it is predicted to cover more than half of the emissions in ETS-regulated sectors. A 2021 report from the United Nations Conference on Trade and Development (UNCTAD) suggested that Russia, China, and Turkey would be most affected by the mechanism, followed by India, Brazil, and South Africa.

India, in particular, faces concerns as the CBAM will impact its trade relations with the EU and its balance of payments. India’s exports to the EU are likely to increase, putting additional pressure on the nation’s economy.

The CBAM is an effort to prevent carbon leakage, where manufacturers in the EU move carbon-intensive production to countries outside the region with less stringent climate policies. The signing of the CBAM on May 10 by the European Commission is a step toward strengthening their engagement on carbon border measures. This will undoubtedly influence how the world approaches future carbon emissions.

References

Ghosh, S. (2023, May 24). Explained | What is the EU’s carbon border adjustment mechanism? The Hindu. https://shorturl.at/drzY6