With climate change posing an existential global threat, policymakers are under increasing pressure to effectively address industries that contribute significantly to carbon emissions. They must put in place measures that ensure carbon-intensive sectors operate under a fair and equitable framework.
The development, implementation, and enforcement of such a framework will demand novel ways of incentivizing the reduction of carbon emissions worldwide. One such initiative emerging from the European Union (EU) is the Carbon Border Adjustment Programme (CBAM). The European Commission formally launched this initiative in December 2019 as part of the European Green Deal.
CBAM is an important strategy in the fight against climate change, addressing the urgent need to balance carbon emissions while maintaining economic growth. It represents a profound shift in thinking among the EU’s legislators and has the potential to shape global standards for addressing carbon emissions through trade policy. Importantly, CBAM is designed in line with the World Trade Organization (WTO) rules.
In this blog, we will discuss the CBAM and examine its positive effects, problems, and complications and their overall implications for global climate action.
What is the Carbon Border Adjustment Mechanism?
CBAM is a regulation that places a fair price on carbon emissions from producing carbon-intensive goods entering the EU. Another objective is to encourage cleaner industrial practices in non-EU countries that trade with EU companies. The main goal of CBAM is to ensure that imports have paid a price for the carbon emissions produced during their manufacturing. This makes the carbon cost of imports comparable to domestic production, safeguarding EU climate goals.
The CBAM regulation commenced its transitional phase in October 2023, with the first reporting period ending in January 2024. Initially, CBAM was applied to specific goods like cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen—industries that have high carbon emissions and are at risk of carbon leakage. This transitional phase served as a learning period to gather information and refine methodologies in collaboration with importers, producers, and authorities.
Under CBAM, imported goods are subject to a carbon price equivalent to the carbon cost of producing a similar good domestically. This means that in instances where products are manufactured in countries with weaker environmental standards, CBAM requires that a tariff or price adjustment be added to them when entering markets with stricter regulations.
Benefits of the CBAM:
- Ensuring Environmental Integrity: CBAM ensures that environmental standards are not avoided by outsourcing production to countries with less developed or lower regulatory standards. This supports the integrity of domestic climate policies and promotes global emission reductions.
- Fair competition: CBAM promotes fair competition so that domestic industries are not unduly disadvantaged by stringent environmental regulations, thus preventing carbon leakage and protecting domestic jobs.
- Revenue Generation: Revenue generated from CBAM tariffs or price adjustments are used to fund climate activities and initiatives, such as renewable energy development or climate adaptation measures, further enhancing the transition to a low-carbon economy.
Challenges:
- Difficult to Implement: The ongoing implementation and enforcement of CBAM is a complex task. This process requires careful consideration of numerous factors, including determining the carbon intensity of imported goods, addressing double taxation concerns, and ensuring compliance with international trade rules.
- Trade Disputes: CBAM measures could lead to trade disputes if it is regarded by trading partners as protectionist or discriminatory. Ensuring compatibility with existing and new trade frameworks will be a key component to mitigate these potential risks.
- Developing Countries: CBAM could impact developing countries disproportionately, as they may have less advanced technological capabilities and limited resources to comply with stringent environmental standards.
Implications for Global Climate Action:
CBAM’s adoption marks a significant moment in the history of the global climate action agenda, particularly for trade and environmental policy addressing carbon pricing. By putting a price on carbon, it becomes an immediate and impactful risk, something that will incentivize action by individual companies, industries, and countries.
The ambitions of the policy are high in that it aims to tackle carbon leakage while simultaneously incentivizing international partners and countries to take climate action. This will require short-term action in line with long-term plans to reach Net Zero. CBAM has the potential to make a real change in global production and consumption patterns. Still, its successful implementation will depend on effective coordination and communication between governments, businesses, regulators, and civil society actors.
In conclusion, it is important that we acknowledge that CBAM is not without its challenges, such as ensuring a commitment to addressing potential equity and development concerns. Having said this, the potential of CBAM to strengthen climate action and promote sustainable development makes it an innovative and powerful tool in the fight against climate change. As countries strive to meet their climate targets and build a resilient low-carbon economy, CBAM could emerge as a crucial component of a comprehensive and equitable climate policy framework.
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