The Carbon Border Adjustment Mechanism (CBAM) is intended to be a tool to combat carbon leakage – a situation where industries with high greenhouse gas emissions relocate production outside the EU to jurisdictions with lower climate policy standards than the EU. This will help reduce emissions on a global scale while ensuring a level playing field for businesses.
How does carbon leakage occur?
When manufacturing in the EU, producers must cover CO2 emissions with allowances from the EU Emissions Trading System (ETS). The ETS does not apply to production outside the EU. As a result, carbon-intensive production can be moved to countries with less stringent climate policies, and imported products can gain price advantages at the expense of the environment. This is known as carbon leakage.
How will CBAM work?
For production outside the EU, EU importers will have to purchase CBAM certificates to cover the price difference resulting from the ETS allowances that EU producers must use to cover their CO2 emissions.
How will CBAM contribute to achieving the climate neutrality target?
CBAM is designed to operate in parallel with the EU Emissions Trading System (EU ETS), which encourages high-emission EU industries to reduce their emissions. CBAM would mirror the impact of the EU ETS on non-EU producers. Furthermore, it would encourage other countries to introduce carbon pricing policies.
Which products will it cover?
The Council proposes that in the first phase, CBAM will apply to sectors with high carbon emissions and a high risk of carbon leakage: iron and steel, cement, fertilisers, aluminium, and electricity.
An image of the Carbon Border Adjustment Mechanism can be viewed here