The European Union’s Carbon Border Adjustment Mechanism (CBAM) went into effect January 1, 2024, placing a carbon levy on imports of carbon-intensive goods like steel, aluminum, cement, and fertilizers. This new policy aims to level the playing field for EU manufacturers who already face strict carbon emission regulations, and prevent “carbon leakage” – the relocation of production to countries with less stringent environmental standards. The implementation of this groundbreaking climate policy is already sparking international trade tensions.
The CBAM initially requires importers to report greenhouse gas emissions embedded in their products. From 2026, importers will be required to purchase and surrender CBAM certificates, priced in line with the EU’s carbon market, which currently ranges from €70-€100 per tonne of CO2. This move is intended to encourage global adoption of carbon pricing and cleaner production methods, but has drawn criticism from several major economies.
Understanding the EU’s Carbon Border Adjustment Mechanism
The CBAM is a three-phase process. The initial phase, beginning in 2023, focused on data collection and reporting. This transitional period allows industries to adapt to the new requirements and refine methodologies for calculating embedded emissions. The current phase, starting January 1, 2024, continues the reporting requirements. The final phase, beginning in 2026, introduces the financial obligation of purchasing CBAM certificates.
According to the United Nations Framework Convention on Climate Change (UNFCCC), heavy industry accounts for up to 15% of total EU energy-related greenhouse gas emissions. The EU hopes the CBAM will incentivize these industries globally to reduce their carbon footprints.
International Reactions and Trade Disputes
The implementation of the CBAM has not been without opposition. The United States, China, India, Russia, and South Africa have all voiced concerns, arguing that the mechanism amounts to protectionism and could violate World Trade Organization (WTO) rules. The US, in particular, has pressured the EU to withdraw the law, following increased tariffs on EU goods earlier this year.
Egypt has become the first country to formally request an exemption from the CBAM, citing the potential impact on its iron and steel industry, which could bear 74% of the financial burden. Cairo is currently developing its own domestic carbon tax to mitigate the effects of the EU’s policy.
Challenges and Concerns Regarding Implementation
Critics of the CBAM highlight the complexities of accurately measuring embedded carbon emissions. Jaime Amoedo, executive director of The ESG Institute, notes that importers will likely face material cost increases, especially when relying on default values due to incomplete emissions data. Accurate and verifiable emissions data is becoming a crucial commercial requirement for exporters seeking to maintain access to the EU market.
Additionally, some industry representatives, like Jean-Marc Germain, CEO of Constellium, express concerns that the CBAM could weaken European competitiveness without significantly reducing global emissions. The aluminum industry, for example, anticipates increased costs as a result of the new levy.
Mitigating Impact with the Decarbonisation Fund
Recognizing the potential financial strain on European industries, the EU Commission proposed a temporary €1.5 billion fund, backed by CBAM revenues, on December 17. This fund aims to help industries cope with the implementation phase and invest in decarbonization technologies.
Ed Collins, managing director at InfluenceMap, suggests the fund is a result of “intense lobbying from incumbent industry actors” seeking reimbursement for carbon costs. While the fund is intended for decarbonization investments, it may partially offset the financial burden of the carbon border tax for some companies.
The EU’s CBAM represents a significant step towards a more sustainable global economy, but its success hinges on international cooperation and addressing the concerns of trading partners. Businesses should closely monitor developments and prepare for the evolving landscape of carbon-related trade regulations. Further details on implementation and potential adjustments to the system are expected throughout 2024 and beyond.
United Nations Framework Convention on Climate Change provides further information on global climate action.
