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The EU ETS ensures that industries do not relocate to countries with less strict climate policies. The Carbon Border Adjustment Mechanism (CBAM) guarantees that the carbon emissions from both EU-produced and imported goods are equally accounted for and priced. This strategy not only balances competition for European industries but also encourages the worldwide implementation of carbon pricing.
The EU ETS ensures that industries do not relocate to countries with less strict climate policies. The Carbon Border Adjustment Mechanism (CBAM) guarantees that the carbon emissions from both EU-produced and imported goods are equally accounted for and priced. This strategy not only balances competition for European industries but also encourages the worldwide implementation of carbon pricing.
The EU ETS makes carbon emissions costly for industries, incentivizing investments in greener technologies. However, these investments are often expensive. Without mechanisms like CBAM, companies might relocate to avoid these costs, weakening the scheme’s climate integrity. Previously, regulators provided free allowances to industries at risk of carbon leakage, but this approach has shown some limitations in its effectiveness in the past. CBAM replaces these free allowance, making sure that the EU ETS keeps bringing optimal climate results.
European businesses can be at a disadvantage compared to those in regions with weaker climate policies. CBAM corrects this imbalance by imposing equivalent carbon costs on imported products, which helps maintain fair competition between EU companies and foreign counterparts.
Beyond combating carbon leakage, the CBAM sends an important global message. By taking this first mover step, the EU sets a worldwide standard for climate policy and encourages the international adoption of carbon pricing mechanisms. Countries like India, Turkey, and Brazil are already among those inspired by the EU ETS model and constructing their own ETS.
Under CBAM, importers report the carbon intensity of their products, which is the volume of CO2 emitted during production. They then pay for these emissions in a way that mirrors the EU ETS pricing for domestically produced goods. If the production site does not have a carbon pricing mechanism, importers pay the EU ETS carbon price. If there is a local carbon pricing system, importers pay the difference between the EU ETS price and the local price for carbon allowances.
The CBAM's initial transitional phase began on October 1st 2023, and will continue through December 2025. During this period, importers are only required to report the carbon intensity of their products, they will start paying for those later on. During those early stages of implementation, companies are allowed to use benchmark values if exact measurements are not yet available. Indeed, some regions of the world have yet to adopt advanced carbon measurement tools. The EU ETS has been a major force in driving the development and implementation of accurate carbon accounting technologies in Europe.
At the start, CBAM focuses on imports from six sectors: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. After the transitional period ends in December 2025, the scope of CBAM can be broadened to include additional sectors such as polymers and chemicals.
From 2026 onwards, importers will surrender allowances for an increasing portion of their carbon emissions. Here’s the annual plan for emission coverage:
The CBAM is one of the newest advancements of the EU ETS, designed to make it even more robust and sophisticated. This mechanism not only protects domestic industries and businesses but also serves as an advocate for the global adoption of carbon pricing. It has proven effective within the EU—now let’s scale up these efforts to achieve global decarbonization.
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