top of page

What is CBAM? 

Introduction

CBAM stands for "Carbon Border Adjustment Mechanism." It is a policy tool introduced to address carbon leakage and ensure that efforts to reduce greenhouse gas (GHG) emissions within a country are not compromised by imports from nations with less stringent climate regulations.

Objectives of CBAM

  • Environmental Protection: CBAM aims to incentivize countries to align their carbon pricing and emission reduction efforts, thus contributing to global climate goals by reducing overall emissions.

  • Preventing Carbon Leakage: CBAM imposes a carbon cost on imports to prevent "carbon leakage," which occurs when companies relocate production to countries with laxer environmental regulations.

  • Promoting Fair Competition: It ensures fair competition between domestic and foreign producers by reducing the competitive advantage of products produced using high carbon emissions.

  • Revenue Generation: CBAM can generate revenue for the implementing country, supporting domestic climate policies, innovation, and green technology investments.

  • Encouraging Global Climate Action: CBAM can motivate other countries to enhance their climate policies to avoid carbon-related trade measures.

Stakeholders and Their Concerns

  • Domestic Industries: CBAM creates a level playing field for domestic industries, preventing the relocation of carbon-intensive production.

  • Foreign Producers: They might face additional costs when exporting to countries implementing CBAM, potentially affecting their competitive advantage.

  • Governments: CBAM can generate revenue, but its implementation requires careful design to balance environmental and economic objectives without conflicting with international trade rules.

Implementation Challenges

  • Complexity: CBAM is complex, involving considerations related to international trade, climate diplomacy, and economic impacts.

  • International Trade Conflicts: Implementing CBAM might lead to potential conflicts with international trade rules and agreements.

Background and Context

  • European Green Deal: The European Commission introduced a new growth strategy to transform the Union into a fair and prosperous society with a competitive economy, aiming for no net emissions of GHGs by 2050.

  • Paris Agreement: Parties agreed to limit the global average temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C.

  • Carbon Leakage: As the Union increases its climate ambition, the risk of carbon leakage could undermine the effectiveness of Union emission reduction policies.

Outlook and Preparation

  • Transition: To ensure a smooth transition from the current system of free allowances to CBAM, it should be progressively phased in.

  • Legal Framework: Companies need long-term visibility, predictability, and legal certainty for investment decisions in decarbonization.

  • Encouraging Decarbonization: CBAM seeks to encourage producers from third countries to use more efficient technologies to reduce GHGs.

Conclusion

The CBAM regulation 2023/956 is a significant step towards addressing carbon leakage and ensuring that the efforts to reduce GHG emissions are consistent across both domestic and imported goods. Stakeholders, including domestic industries, foreign producers, and governments, need to be aware of the implications and prepare accordingly.

bottom of page