Blog Bio Ressources - Carbon Border Adjusting Mechanism, the solution to carbon leakage?

As the world grapples with the urgent need to reduce greenhouse gas emissions, the policies for industrial decarbonization are on the rise. The European Union’s Carbon Border Adjustment Mechanism (CBAM) is one such policy—a bold and complex initiative that seeks to tackle a persistent problem in climate policy: carbon leakage. But is CBAM truly the solution to this global challenge?

What is Carbon Leakage?

With Europe being a pioneer in energy transition and decarbonization policies, many companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place, or when EU products get replaced by more carbon-intensive imports.

This phenomenon undermines efforts to cut emissions and shifts the environmental burden to countries that are already environmentally vulnerable. As a result, the global environment is further impacted, and EU countries lose significant revenue

How CBAM works?

CBAM is a carbon levy on EU imports based on the emissions generated during production. It works by placing a carbon price on imports of certain carbon-intensive goods. It aligns with the EU carbon price to prevent companies from relocating abroad and encourages foreign producers to cut emissions to remain competitive. In other words, foreign producers exporting to the EU would need to purchase carbon certificates equivalent to the price they would have paid under the EU’s Emissions Trading System (ETS).

Initially, CBAM covers a list of 303 energy-intensive products (iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen). Together, these products account for about 3% of EU imports.

Transition period and effects

On 1 October 2023, CBAM entered into force in its transitional phase, with the first reporting deadline for importers set for 31 January 2024. This gradual implementation ensures a careful, predictable, and proportionate adjustment for both EU and non-EU businesses, as well as public authorities. Once fully implemented, CBAM is expected to cover over 50% of emissions from sectors under the EU ETS. The transitional phase acts as a pilot and learning period for all stakeholders—including importers, producers, and authorities—and aims to gather valuable data on embedded emissions to improve the methodology for the permanent phase. CBAM will apply in its definitive regime from 2026, and proposals have already been approved in order to ease the administrative demands and simplify the procedures.

A key immediate challenge is the accurate measurement and verification of emissions from imports, as many trading partners will need to upgrade their emissions tracking systems to align with EU requirements. There’s also a risk of selective compliance, where countries send their lowest-emission products to the EU while using higher-emission ones domestically—undermining CBAM’s goal of reducing global emissions.

In the long term, the mechanism’s success will hinge on how businesses and governments respond. Companies that invest in cleaner technologies will likely gain a competitive advantage, while others may face difficulties. The policy also encourages other countries to introduce their own carbon pricing systems, allowing them to retain the revenue rather than paying it at the EU border.

To conclude, the Carbon Border Adjustment is a significant step toward addressing the problem of carbon leakage. In order to be truly effective, it must be met with international cooperation, broader sectoral coverage, and robust enforcement. Will this mechanism be able to successfully align climate ambition with economic competitiveness?

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