The Carbon Border Adjustment Mechanism (CBAM) is a flagship initiative of the European Union. Its purpose? To align trade policies with the EU's climate objectives. However, recent modifications have raised concerns about its effectiveness and its impact on the EU’s environmental ambitions. Investors are rightly questioning the stability of the regulatory framework and the risks of diluting climate goals.
What is the CBAM?
The CBAM, also known as the Carbon Border Adjustment Mechanism, is a European regulatory tool designed to combat carbon leakage—the phenomenon where high-emission industrial activities are relocated outside the EU to avoid stricter regulations.
The CBAM serves as an additional instrument to help the EU achieve carbon neutrality by 2050. Introduced under EU Regulation 2023/956 since October 1, 2023, it aims to apply a carbon price to imported goods when their production has generated greenhouse gas (GHG) emissions.
The CBAM is being phased in according to the following schedule:
October 1, 2023 – December 31, 2025: Transitional Phase
- During this period, importers must report the GHG emissions associated with imported products in the following sectors:
- Cement
- Iron and steel
- Aluminum
- Fertilizers
- Hydrogen
- Electricity
From January 1, 2026: Full Implementation
- Importers will be required to purchase and surrender CBAM certificates corresponding to the GHG emissions of their imported products.
The CBAM will gradually increase in scope over nine years, from 2026 to 2034, in parallel with the gradual reduction of free allowances under the EU Emissions Trading System (EU ETS) for covered sectors.
To achieve this, the CBAM imposes a carbon price on imported goods equivalent to that applied to European producers. Initially, it applies to industries most exposed to carbon leakage, such as iron, steel, cement, fertilizers, and aluminum. By aligning constraints between European and foreign producers, the EU eliminates incentives for industries to relocate. Everyone operates under the same rules.
An Example:
A company in India exports steel coils to a German automobile manufacturer. Since steel falls under CBAM regulation from the transitional phase (2023-2025), the following process applies:
- During the transitional phase, the German importer must declare the CO₂ emissions associated with steel imports, but no payment is required.
- From the definitive phase in 2026 onward, the importer must purchase CBAM certificates corresponding to the CO₂ emissions of the imported products.
- Cost Example: If the carbon price remains at the 2025 level of €72.26 per ton of CO₂, the CBAM certificate cost would be €144.52 per ton of imported steel (assuming 2 tons of CO₂ per ton of steel).
In parallel, the implementation of the CBAM justifies the gradual elimination of free allowances. As CBAM coverage expands, free emission allowances for covered industries decrease, disappearing entirely by 2034.
By ensuring that imports are subject to a comparable carbon price to that of European products, the EU aims not only to reduce its carbon footprint but also to encourage other countries to adopt more ambitious climate policies.
However, the latest modifications to the CBAM have sparked debates among investors and economic observers. Some fear an overly lenient application of the mechanism, while others worry about unintended consequences on the competitiveness of European industry.
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Criticisms and Shortcomings of the CBAM
Despite its laudable intentions, the CBAM faces several criticisms. Some analysts see it as a protectionist measure that could trigger trade tensions with international partners, including China and India. Representatives of the World Trade Organization (WTO) have expressed concerns about the CBAM's compatibility with international trade rules.
Other criticisms focus on the complexity of implementing the mechanism. Accurately measuring the carbon footprint of imported products can be a technical and administrative challenge. Tracking global supply chains and precisely determining a product’s carbon impact is difficult. This complexity and potential lack of transparency could create opportunities for circumvention or fraud, undermining the system’s effectiveness.
Another point of contention is how CBAM-generated revenues will be used. Ideally, these funds should be reinvested in ecological transition and green innovation. However, some economists worry that these resources may be diverted for other budgetary purposes, reducing the mechanism’s climate impact. Additionally, CBAM revenues represent a transfer of capital from exporting countries to the EU. Some major exporters to the EU argue that these funds should be partially redistributed to finance their own energy and climate policies.
The Importance of Iterations to Address Legitimate Concerns
Given these challenges, an iterative approach is essential. Unlike a rigid regulation, an iterative system allows the CBAM to be adjusted based on stakeholder feedback and economic realities. By integrating successive improvements, the CBAM can address its shortcomings while ensuring a pragmatic implementation.
Iterations help consider application difficulties faced by businesses and better align the mechanism with international trade rules. Some experts suggest increasing system transparency by publishing more detailed data on carbon footprint calculations or granting temporary exemptions for certain developing countries.
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Iterative and Progressive Policy Frameworks: The Example of the EU ETS
The EU Emissions Trading System (EU ETS) illustrates the effectiveness of an iterative approach to climate policy. Established in 2005, it is based on a cap-and-trade principle, where companies must purchase emission allowances based on their needs, creating a financial incentive to reduce their carbon footprint.
The EU ETS has evolved over time through regular adjustments aimed at enhancing its effectiveness. One example? The gradual removal of free allowances has increased the carbon price, encouraging the adoption of cleaner technologies. This adaptive model demonstrates that climate mechanisms should be designed as dynamic and adjustable processes.
Outlook and Outstanding Questions
As the CBAM continues to evolve, several questions remain. How can the mechanism ensure it does not disproportionately penalize developing countries? What measures will be implemented to ensure a fair transition for industries? How will the EU collaborate with international partners to harmonize climate efforts and avoid trade conflicts?
For investors, the CBAM presents both an opportunity and a challenge. On one hand, it could favor European companies committed to ecological transition by ensuring fair competition. On the other, regulatory uncertainty and potential trade tensions could deter investments. Clarification of the rules and better visibility on future developments are crucial to maintaining the attractiveness of the European market.
Finally, green finance stakeholders see the CBAM as a strategic lever to direct capital toward more sustainable companies and combat climate change. Integrating the CBAM into a broader approach, including financial incentives for transitioning businesses, could enhance its impact and facilitate the adoption of a low-carbon economy on an international scale.
While the CBAM presents challenges and criticisms, its iterative evolution—following the model of the EU ETS—offers a promising path to strengthening the EU's climate goals while considering economic and political realities.
Sources
- https://trade.ec.europa.eu/access-to-markets/fr/news/mecanisme-dajustement-carbone-aux-frontieres-macf
- https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en?prefLang=fr
- https://www.ecologie.gouv.fr/politiques-publiques/systeme-dechange-quotas-demission
- https://www.lemonde.fr/idees/article/2024/11/13/le-climat-c-est-aussi-de-l-economie-avec-une-competition-acharnee-entre-la-chine-les-etats-unis-et-l-union-europeenne_6390999_3232.html
- https://www.actu-environnement.com/blogs/violaine-du-pontavice-/442/mecanisme-ajustement-carbone-aux-frontieres-une-nouvelle-taxe-pour-limiter-fuites-carbone-721.html
- https://presse.economie.gouv.fr/02102023-mise-en-oeuvre-du-mecanisme-dajustement-carbone-aux-frontieres-macf-au-1er-octobre-2023/
- https://eur-lex.europa.eu/FR/legal-content/summary/carbon-border-adjustment-mechanism.html
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