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July 10, 2023

European Union to introduce Carbon Border Adjustment Mechanism

3 Min. Read
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The United Nations 13th Global Carbon Emissions Gap Report shows that updated national pledges since COP26 in Glasgow in 2021 have made a small difference to projected 2030 emissions, but we are far from the Paris Agreement target of limiting global warming to well below 2°C, preferably 1.5°. The report shows that the world needs to cut carbon emissions by 45 percent to avoid global catastrophe. Carbon emission measurement studies show that about 20-30 percent of total carbon dioxide emissions, which account for most greenhouse gas emissions, are associated with international trade.

The European Union has taken a big step towards solving this problem. It legislated for a "green tariff" on imports to be applied to goods produced with high carbon dioxide emissions, becoming the first major economy to take action in this area. Known as The Carbon Border Adjustment Mechanism (CBAM), the main objective of this process is to prevent companies from moving their polluting activities to countries with weaker environmental rules.

With the Carbon Regulatory Mechanism at the Border, countries that fail to green industries will face a new sanction: an effective carbon tax that will penalize those hoping to profit from high-carbon activities and drive them towards green operations. The first phase of the system will apply to iron and steel, cement, fertilizers, aluminum, electricity, hydrogen and some chemicals.

According to Josef Síkela, Minister of Industry and Trade of the Czech Republic, who is leading the negotiations in the European Union parliament, the Border Carbon Regulation Mechanism is a crucial part of the EU's climate action plan. According to Síkela, the mechanism is intended to incentivize the import of goods by non-EU businesses that meet the climate standards applicable in the 27 EU countries. This taxation will ensure fair treatment of imports and aims to encourage global partners to join the EU's climate efforts.

The expected date for CBAM to enter into force is currently set for October 2023.  

Frans Timmermans, Vice-President of the European Commission, is of the view that CBAM can bring about a very serious and effective transformation in many areas of industry. Timmermans underlines that in a scenario where all stakeholders in the European industrial sector do not cooperate, it is very difficult to control CO2 emissions and make significant progress towards climate targets.

Pascal Canfin, chairman of the EU parliament's environment committee, also welcomed the taxation system. He underlined that with this taxation profit, a fair treatment will be ensured between companies that provide services within European borders and pay carbon fees and foreign companies that do not. It is a very important step both to protect companies in this sense and to take more efficient steps towards climate targets. Although the CBAM requirements will only apply to a few sectors at first, Canfin said that the EU parliament is aiming for big steps forward. He underlined that measures are being taken to tackle today's unfair competition and alarming levels of carbon leakage, so that a comprehensive restructuring will not be necessary.  

This step promises to be a major push as part of the EU green deal to meet EU climate targets. It is also seen as a first step towards a fair global effort to reduce greenhouse gas emissions in a global carbon trading war.

While the US and the UK's response to CBAM remains to be seen, the countries most likely to be affected by Europe's new taxation system are those with high-carbon export industries, such as Turkey, China, Australia and India.  

Economist Lord Stern, who has been working on climate and development issues for many years, believes that such a taxation requirement is a tough pill to swallow, especially for high-carbon industries such as steelmakers, but it is certainly one that should be implemented. While traditional steelmaking is considered a high-carbon industry because it requires high levels of fossil fuel use, some companies are now taking important steps towards a future "green steel transition" with the use of electric arc furnaces and hydrogen as fuel. Carbon taxes on steel are therefore likely to be an important incentive for green transformation in the industry.

Economist Stern notes that the implementation of CBAM needs to be planned effectively, and in order to do so, the CBAM requirements need to be very clear in terms of definition and usage. He also notes that these requirements should focus in particular on sectors such as steel and cement, which continue to produce largely using traditional methods.  

CBAM is expected to be a highly effective move towards the EU's goal of reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. Previous plans for these targets have been met with opposition from countries such as China, which has high carbon emissions but a large economy. At a time when the EU's carbon cap and tax plans and policies are highly controversial, CBAM's future in major economies and international trade plays a decisive role in creating a green sector.