Understanding CBAM
Internal carbon trading mechanisms like the EU’s Emissions Trading System (ETS) have been effective in reducing emissions domestically, however concerns exist about carbon leakage: where industries with high carbon footprints relocate to, or import from, countries with less stringent environmental regulations. Essentially shifting emissions instead of reducing them. The Carbon Border Adjustment Mechanism (CBAM) seeks to mitigate this practice.
CBAM aims to level the playing field by applying a carbon price at the EU and UK borders on imports of specific goods from countries with weaker carbon pricing mechanisms. This puts a price on the embedded carbon of a number of imported products, ensuring a comparable carbon price is incorporated no matter the point of origin. Currently, CBAM covers six materials of a high carbon intensity and leakage risk: cement, iron and steel, aluminium, fertilizers, electricity and hydrogen.
The aims of CBAM are twofold:
For context, in 2021, the EU imported approximately seventy million tonnes of cement, which contributed to roughly 13 % of the EU’s total cement consumption. The main exporter was Turkey, followed by China and Vietnam. Given that Turkey and Vietnam do not currently have operational ETS, CBAM will apply to a substantial share of the EU’s current cement procurement. The same is true for the iron and steel industry, where a significant share comes from China and Turkey, meaning CBAM is likely to have a major impact.
The concept of CBAM has been debated for years, and its full implementation marks a significant step in climate policy. The EU adopted the initial regulation in 2021, with the UK announcing its own implementation last December. CBAM is currently in its transitional phase across the EU. Today, all imported goods must be accompanied by declarations of embodied carbon emissions; businesses are not obliged to pay a financial charge at present, although this will come into effect from 2026 in the EU, and 2027 in the UK.
While CBAM can be seen as positively mitigating against carbon leakage, some critics are concerned about potential complications for international trade. The additional bureaucratic burden of complex reporting regulations has led to concerns over the higher operating costs the policy will impose on businesses. Others are worried about increased tension between countries that do not yet have and have not adopted CBAM, with less regulated countries likely to be disproportionately impacted by changing trade flows. It is hoped these risks will be minimised through increased transparency and close co‑operation on an international scale, promoting and facilitating fair trade.
CBAM has been designed to comply with World Trade Organisation (WTO) regulations and comprises of several flexibilities that encourage unity with WTO policies. The implementation period (between now and 2026 for the EU, and 2027 for the UK) will provide an essential opportunity for policy makers to gather information and assess further adaptations that may be necessary. Adopting CBAM will help to maintain and restore competitive advantage of EU and UK based companies who could be disadvantaged by cheaper and less carbon intensive goods from overseas competitors.
In future, CBAM has the potential to expand its scope to include other carbon intensive goods, although this is likely to be decided once the implementation phase is complete.
The Carbon Border Adjustment Mechanism marks a landmark moment in climate policy and demonstrates the ambitions of the EU and the UK to support climate action and recognise businesses who operate more sustainably. To be successful, the mechanism must continue to carefully balance environmental ambition with the realities of trading.
