The Carbon Border Adjustment Mechanism (CBAM) is a tariff applied by the European Union on carbon-intensive goods imported from outside the bloc. Its primary goal is to ensure that the carbon price of imports is equivalent to the carbon price of domestic production, preventing "carbon leakage" and promoting global decarbonization.
The Carbon Border Adjustment Mechanism (CBAM) is a cornerstone of the European Union's "Fit for 55" climate package, designed to tackle climate change and ensure a level playing field for EU industries. It functions as a climate-focused import levy, requiring importers of certain goods to pay a price for the carbon emissions embedded in those products. This is critical for preventing "carbon leakage"—a situation where EU companies move their production to countries with less stringent environmental policies to avoid carbon costs, undermining the EU's climate efforts.
CBAM works by mirroring the costs faced by EU producers under the EU Emissions Trading System (EU ETS). It is being phased in gradually, with a full implementation planned for 2026. The mechanism operates in a few key steps:
- Scope: Initially, CBAM covers imports in sectors with a high risk of carbon leakage: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
- Reporting: During a transitional phase (starting October 2023), importers are only required to report the quantity of goods and their embedded greenhouse gas emissions, without any financial payment.
- Certificate Purchase: From 2026, importers will need to purchase "CBAM certificates" corresponding to the emissions embedded in their imported goods. The price of these certificates will be directly linked to the weekly average auction price of EU ETS allowances (EUAs).
- Alignment: As CBAM is phased in, the free allowances currently allocated to EU producers under the ETS will be phased out, ensuring both domestic and imported goods face equivalent carbon constraints.
Concrete Example
Imagine a German car manufacturer that imports steel from a non-EU country where there is no carbon price.
- Before CBAM: The imported steel is cheaper than EU-produced steel, as its producer doesn't pay for its CO₂ emissions. This creates an unfair competitive advantage and encourages outsourcing (carbon leakage).
- With CBAM: The German importer must now calculate the carbon emissions associated with producing that steel. They are then required to buy a corresponding number of CBAM certificates. This effectively adds a carbon cost to the imported steel, leveling the playing field with steel produced within the EU under the ETS.
For more details on the official regulation, you can consult the European Commission's CBAM page.