The Carbon Border Adjustment Mechanism (CBAM) is a landmark European Union policy that applies a carbon price to certain carbon-intensive goods imported into the EU. Its primary goal is to prevent "carbon leakage" by ensuring that the climate costs faced by EU producers are also borne by foreign producers, creating a level playing field for global trade.
The Carbon Border Adjustment Mechanism (CBAM), also known as a "carbon border tax," is a critical component of the EU's "Fit for 55" package designed to achieve a 55% reduction in greenhouse gas emissions by 2030. It is fundamentally a tool to prevent carbon leakage, which occurs when companies move their production from a region with strict climate policies (like the EU) to countries with less stringent regulations to save costs, thereby undermining global climate efforts. The CBAM addresses this by equalizing the price of carbon between domestic products and imports.
This mechanism is strategically linked to the EU Emissions Trading System (EU ETS), the world's largest carbon market. By ensuring that imported goods face a comparable carbon cost to those produced within the EU, the CBAM protects the competitiveness of European industries and strengthens the incentive for global decarbonization. It effectively extends the EU's climate ambition beyond its borders, encouraging non-EU countries to adopt their own robust carbon pricing policies.
The implementation of CBAM is divided into two key phases:
- 1. Transitional Phase (October 2023 - December 2025): During this initial period, importers are only required to report the "embedded emissions" in their goods without any financial payment. This phase is designed to collect data and allow businesses and authorities to prepare for the definitive system.
- 2. Definitive Phase (Starting January 2026): Importers will be required to purchase and surrender a number of "CBAM certificates" corresponding to the embedded emissions of their imported goods. The price of these certificates will be directly linked to the weekly average auction price of EU ETS allowances (EUAs), creating a direct financial connection to Europe's carbon market.
The CBAM initially targets imports in sectors with a high risk of carbon leakage:
- Cement
- Iron and Steel
- Aluminium
- Fertilizers
- Electricity
- Hydrogen
Concrete Examples
Use Case 1: Leveling the Playing Field for Steel
An Italian steel manufacturer must purchase EUAs on the EU ETS market to cover its CO₂ emissions, which adds to its production costs. Previously, a competitor in a country with no carbon price could export steel to the EU at a lower cost. Under CBAM, the importer of that foreign steel must now buy CBAM certificates to cover the product's embedded emissions, effectively eliminating the unfair cost advantage and encouraging cleaner production globally.
Use Case 2: Incentivizing Foreign Decarbonization
A fertilizer producer in North Africa exports a significant portion of its production to the EU. To maintain its market share and reduce future costs under the CBAM, the company is now incentivized to invest in new, less carbon-intensive production technologies. This demonstrates how the CBAM's influence extends beyond EU borders, promoting global climate action.
For more information, you can consult the European Commission's official CBAM page.