What is the Carbon Border Adjustment Mechanism (CBAM)?
Summary
The Carbon Border Adjustment Mechanism (CBAM) is a European mechanism aimed at taxing the import of carbon-intensive goods, such as steel and cement. Its goal is to prevent carbon leakage and protect European industries by aligning the costs of imported products with those of European producers who are subject to climate regulations. CBAM is part of the European Green Deal, which seeks to reduce greenhouse gas emissions.
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Definition of CBAM
The Carbon Border Adjustment Mechanism (CBAM) is a mechanism established by the European Union to adjust the carbon price at its borders. It aims to apply a tax on the import of carbon-intensive goods to avoid “carbon leakage,” which refers to the relocation of production to countries with less strict environmental regulations. CBAM thus protects European industries while maintaining their competitiveness against international competitors. It is part of the European Green Deal, which aims for carbon neutrality by 2050.
How does CBAM work?
CBAM works by applying a carbon tax at the EU’s borders on imports of carbon-intensive products, such as steel, aluminum, cement, fertilizers, and electricity. This mechanism requires importers to purchase CBAM certificates corresponding to the CO2 emissions related to the production of imported goods. The goal is to align the carbon cost of imports with that of goods produced within the EU, reducing the competitive advantage of countries without strict carbon regulations.
Unlike the European Union Emission Trading System (EU ETS), where European companies receive emission quotas to trade, CBAM specifically targets imports. CBAM complements the EU ETS by extending emissions regulation beyond Europe’s borders, ensuring that CO2 reductions do not undermine the competitiveness of European industries.
CBAM’s Objectives
The primary objectives of CBAM are to reduce greenhouse gas emissions in carbon-intensive industrial sectors. By imposing a carbon tax on imports, it encourages non-European companies to adopt more sustainable production practices. The mechanism also helps preserve the competitiveness of European companies by balancing the costs associated with strict environmental regulations within the EU. Finally, CBAM aligns with the Paris Agreement’s climate goals by promoting global CO2 emission reductions while supporting the EU’s decarbonization efforts.
Sectors Affected by CBAM
CBAM mainly targets carbon-intensive sectors such as steel, aluminum, cement, electricity, and fertilizers. These industries are significant contributors to CO2 emissions and are now subject to a carbon tax on products imported into the EU.
Imports from non-EU countries without stringent CO2 regulations are subject to this tax. Consequently, companies in affected countries must adjust their production processes to reduce their carbon footprint.
Tip
To protect the competitiveness of European companies and incentivise more sustainable production practices, the CBAM imposes a carbon tax on carbon-intensive imports, encouraging industries to reduce their emissions.
CBAM in practice: calculation and collection of the carbon tax
CBAM calculates the carbon tax based on the CO2 emissions generated during the production of imported goods. Importers must declare the emissions associated with their products and pay a tax equivalent to the carbon price within the EU. If the emissions data is unavailable, a standard estimate based on specific criteria is used.
Companies must also follow a regular reporting process to ensure emission transparency. EU authorities oversee and verify these reports to ensure compliance.
The revenue generated from this tax is used to fund Europe’s energy transition by supporting renewable energy and energy efficiency projects. Thus, CBAM helps further reduce greenhouse gas emissions while enhancing the competitiveness of European industries.
Advantages and challenges of CBAM
CBAM offers several advantages, including combating carbon leakage by imposing costs on carbon-intensive imports. It also encourages industries to reduce their emissions by aligning carbon prices between imported and domestic products.
However, several challenges exist, such as potential trade tensions with non-European partners, who may see this measure as a trade barrier. Additionally, importers face additional costs to comply with the new regulations, which could impact global supply chains and lead to a reorganization of international trade.
Comparison with similar mechanisms around the world
CBAM is one of the first large-scale carbon border tax mechanisms, but other countries are exploring similar initiatives. In the United States, while there is no carbon border tax yet, some legislative proposals are under discussion. Canada and Australia are also considering similar measures to protect their local industries while reducing emissions.
