What is the Carbon Border Adjustment Mechanism?

July 25, 2024

The Carbon Border Adjustment Mechanism (CBAM) was created by the European Union as part of its larger plan to fight climate change and keep European businesses competitive.

What is CBAM?

As part of CBAM, goods are taxed based on how much greenhouse gas (GHG) they produce. Key industries that are taxed include iron and steel, cement, aluminum, and fertilizers. The goal of this change is to make sure that companies from outside the EU that use the Emissions Trading System (ETS) have the same carbon costs as companies in the EU.

Aim and Rationale

The main goal of CBAM is to stop carbon leakage, which happens when companies move output to countries with laxer rules on emissions. The EU wants to promote cleaner ways of making things around the world by putting a tax on carbon. A lot of people are worried about the implementation of CBAM, especially about how fair it is and what it means for foreign trade in general. Some people are against it because they say it might hurt poor countries more than others because they don’t have the money to invest in cleaner technologies.

Impact on Developing Countries

As developing countries try to figure out how to trade in the new way that CBAM has created, they may experience big economic losses in key areas. The method could make it harder for them to access global markets and slow down economic growth, which has made people worry that it will make inequality worse. In CBAM, developing countries are blamed for the climate problem even though they may not be the main cause of it. Critics point out that developed countries have a history of failing to help emerging countries make the switch to green energy, which is their fault.

About the Emissions Trading System (ETS)

The Emissions Trading System (ETS) is a market-based way to control pollution by giving people financial reasons to cut down on pollution. It was set up in the EU in 2005 and now covers more than 11,000 companies and power plants. Cap-and-trade is the idea behind the scheme. It sets overall emission limits and lets companies trade allowances. Norway, Iceland, and Liechtenstein are all part of the EU ETS. Other countries, like California and New Zealand, have also started their own similar schemes. The ETS’s pricing of carbon supports new ideas and investments in green technology.

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