Introduction to CBAM

The Carbon Border Adjustment Mechanism (CBAM) is a crucial part of the European Union's strategy to combat climate change and prevent carbon leakage. Carbon leakage occurs when companies transfer production to countries with laxer emission constraints, undermining global emission reduction efforts. CBAM ensures that imported goods to the EU are subject to the same carbon costs as products produced within the EU, promoting fair competition and encouraging global decarbonization.

How CBAM Works

CBAM targets carbon-intensive imports such as cement, electricity, fertilizers, iron and steel, and aluminum. During its initial transitional phase, importers must report emissions embedded in these goods but are not yet required to pay carbon costs. From 2026, only authorized CBAM declarants can import covered goods, and starting in 2027, they will need to surrender CBAM certificates reflecting the carbon content of their imports. The certificates' prices will align with the EU Emissions Trading System (ETS), ensuring consistency in carbon pricing across domestic and imported goods.

Key Objectives and Benefits

1. Preventing Carbon Leakage: By leveling the playing field, CBAM mitigates the risk of companies relocating production to avoid stricter EU climate policies.
2. Promoting Global Decarbonization: CBAM encourages countries outside the EU to adopt greener technologies to avoid the additional costs of exporting to the EU.
3. Supporting EU Climate Goals: CBAM complements the EU ETS, contributing to the EU's broader objective of achieving climate neutrality by 2050.

Implementation and Compliance

Importers must track and report emissions accurately, with records verified by accredited third parties. National authorities oversee the system, ensuring compliance and preventing fraud. The European Commission facilitates coordination and manages a central database for CBAM certificates, ensuring transparency and accountability.

Conclusion

The CBAM represents a significant step towards a global carbon pricing framework, reinforcing the EU's leadership in climate action. By integrating imports into its carbon pricing mechanism, the EU aims to reduce its carbon footprint comprehensively and drive international efforts towards a more sustainable future.