Carbon Border Adjustment Mechanism (CBAM) is a policy initiative designed by the EU to reduce carbon emissions and carbon leakage which occur in imported commodities, ensuring that importers incur the same carbon costs as domestically produced goods. The goal of this tool, as part of the EU Green Deal, is to reduce “carbon leakage”. Carbon leakage refers to the increase in emissions when an industry relocates from a country with strict climate regulations to a country with weak standards to avoid the cost of complying with carbon reduction targets. Carbon leakage mainly occurs when companies move production to countries with less stringent climate policies to reduce their costs but end up creating higher overall emissions which negatively affect our environment. Hence, CBAM will help to provide more structure to a market that is still looking to define itself at a larger global scale. The imposition of this carbon tax via CBAM aims to effect external change from inside out aiming to achieve its carbon goals by 2050.
Iron & steel, aluminium, cement, hydrogen, and electricity are among the industries that the framework is targeting first due to their high carbon intensity. There are discussions being done to expand the scope to other industries over time. CBAM is going to be implemented in phases, currently we are in the transitional (2023-2025) phase whereas from 2026 we will be in the complete implementation phase.
The amount of greenhouse gas (GHG) emissions generated during the production process will subjected to the carbon price established by CBAM. Importers will be liable to disclose the emissions linked to their products and acquire certificates to indicate these emissions. The carbon price set in the implementing region through EU Emissions Trading System (EU ETS) is directly connected to the cost of these certificates and the price of CBAM certificates is directly linked to the price of the EU ETS allowances. The price of EU ETS credits varies according to market conditions. As of February 2025, EU Allowances are priced at about €75.89 per tonne of CO2e but by 2034 they are expected to rise to about €250 which suggests there will be a constant yearly increase.
The EU’s implementation of the Carbon Border Adjustment Mechanism (CBAM) has generated debates about instigating similar frameworks across the globe. Nations have started to assess their carbon pricing regimes to prevent potential trade disadvantages and adhere to World Trade Organization (WTO) guidelines along with emerging international environmental requirements. This mechanism is currently serving as an incentive for countries to implement effective carbon pricing and reduce emissions, fostering a more uniform global approach to addressing climate change. However, CBAM has also triggered domestic concerns within the EU, with some import-dependent industries and business groups warning that it may raise production costs and complicate supply chains. Several EU companies have expressed concern over the potential loss of competitiveness and increased administrative burden, especially as many of their suppliers are in countries with weaker climate policies.
In conclusion, CBAM seeks to level the carbon costs of imported and local commodities, constitutes a substantial change in global trade and environmental policy. Its implementation has significant effects on the dynamics of international trade, pushing firms to use greener production techniques and pushing countries to evaluate their environmental regulations to stay competitive.
