Carbon Border Adjustment Mechanism (CBAM)

June 12, 2024

The CBAM is a proposed mechanism aimed at reducing carbon leakage, which occurs when companies relocate their production to countries with lower carbon prices or laxer environmental regulations to avoid the costs of reducing their carbon footprint. The CBAM aims to level the playing field by imposing a carbon price on imported goods from countries without similar carbon pricing mechanisms.

How does the CBAM work?

  1. Carbon pricing: The EU will establish a carbon price for imports from countries without a carbon pricing mechanism. This will be done by calculating the carbon intensity of the imported goods and applying a carbon price to the import value.
  2. Carbon border adjustment: The carbon price will be added to the import value, making imported goods more expensive. This will create a level playing field, as domestic producers will face similar carbon costs.
  3. Exemptions and phase-ins: The CBAM will likely include exemptions for certain sectors or countries, as well as phase-in periods to allow companies to adapt to the new system.

Benefits of the Carbon Border Adjustment Mechanism:

  1. Reduced carbon leakage: By imposing a carbon price on imports, the CBAM will reduce the incentive for companies to relocate production to countries with lower carbon prices.
  2. Increased competitiveness: The CBAM will create a level playing field, allowing domestic producers to compete fairly with imported goods.
  3. Environmental benefits: The CBAM will contribute to the EU's climate change mitigation efforts by reducing carbon emissions from international trade.

Challenges and controversies:

  1. Trade tensions: The CBAM may lead to trade tensions with countries that do not have a carbon pricing mechanism, as they may view the measure as a form of protectionism.
  2. Complexity: The CBAM will require complex calculations and data collection, which may be challenging to implement and monitor.
  3. Exemptions and phase-ins: The CBAM will need to strike a balance between ensuring a level playing field and providing exemptions and phase-ins to avoid disrupting global trade and supply chains.

As of February 2024, the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM) is expected to go into effect in 2026 and will impose import charges on certain products.

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