Avoiding the Pitfalls of an EU Carbon Border Adjustment Mechanism

A leaked draft of the EU’s CBAM regulation provides fresh insights into what the Commission plans to do. But it also raises a number of tricky questions. 

The EU wants to introduce a carbon border adjustment mechanism (CBAM) to ensure its climate change mitigation measures are effective and do not lead to so-called carbon leakage. Imports would be subject to a carbon-related fee, reflecting the costs that the EU imposes on domestic producers under its emissions trading system (ETS). While the proposal might still change ahead of publication, a leak of the European Commission’s draft CBAM regulation and annexes provides fresh insight into the EU’s approach. It also raises a number of questions on the impact on small and medium sized importers, developing countries, the allocation of free allowances and the UK.

The Commission wants the CBAM to cover importers of electricity, iron and steel, cement, aluminium and some fertilisers in the first instance, but it could be extended to cover additional sectors in the future. The initial list of sectors is fairly narrow, and does not include a number of industries covered by the EU’s ETS such as other chemicals, ceramics and paper. However, as an opening gambit, the choice of industries has a political logic, if the Commission is still hoping for the US to implictly accept the CBAM, and avoid further trade disputes. The US is just 12th in the ranking of countries most exposed to the proposed CBAM regulation.

To read the full report from the Centre for European Reform (CER), please click here. 

Image from the Centre for European Reform.