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As part of the fight against climate change, the European Union (EU) has launched what it considers to be one of the key instruments within the European Green Pact: The Carbon Border Adjustment Mechanism, also known as CBAM. It is an essential part of the \u201c<\/span>Fit for<\/span><\/i> 55\u201d measures package, a set of proposals to revise and update EU legislation to ensure that the EU’s intermediate target of reducing greenhouse gas (GHG) emissions by 55% by 2030 is met. This proposal has already been described as “bold, complicated and controversial” and several countries have already expressed concerns about its implementation. The measure will undoubtedly disrupt trade relations between the EU and its partners, but let’s look at exactly what it is.<\/span><\/p>\n The CBAM is intended to be implemented in parallel to the EU Emissions Trading Scheme (ETS) to counter the so-called \u2018carbon-leakage\u2019. Based on the “cap-and-trade” principle, the ETS sets a price on carbon and, each year, industries covered by the ETS must buy allowances corresponding to their GHG emissions. These allowances are limited, and each year the limit is lowered with the aim of creating financial incentives for companies to reduce their emissions.<\/span><\/p>\n The issue is that this could lead to what is known as carbon leakage: although some companies, which production processes are high in GHG emissions, are allocated free allowances to support their competitiveness, these will be progressively phased out, raising the risk that they may consider moving their production to other countries outside the EU in order to avoid the increased costs associated with the ETS, importing products at a more advantageous price to the detriment of the environment. <\/span>\u00a0<\/span><\/p>\n This is where the CBAM applies. This is a tariff on carbon-intensive products imported to the EU to balance by equalising the carbon price of imports with the carbon price of EU products. The phasing out of the free allocation of allowances under the ETS will take place in parallel with the introduction of the CBAM mechanism, ensuring coherence between climate objectives and trade policy.<\/span><\/p>\n\n
\n<\/span><\/p>\nRisk of carbon-leakage<\/b><\/h3>\n