Carbon Border Adjustment Mechanism

Subject :Economy

Context:

European Union governments have reached a deal on the world’s first major carbon border tax to make its economy carbon-neutral by 2050.

Concept:

Carbon Border Adjustment Mechanism:

The European Union has proposed a policy — called the Carbon Border Adjustment Mechanism — to tax products that are extremely carbon intensive, with effect from 2026.
It is a duty on imports based on the amount of carbon emissions resulting from the production of the product in question. Thus, adds a pollution price on certain imports to the European Union.
Carbon-intensive industries inside the bloc must comply with strict emissions standards and CBAM is designed to ensure that domestic businesses are not undermined by competitors in countries with weaker rules.
The measure will apply first to iron and steel, cement, aluminum, fertilizers, electricity production and hydrogen before being extended to other goods.
It also disincentivizes EU companies from moving production to more tolerant countries called the “carbon leakage.”
Companies will need to buy certificates to cover emissions generated by the production of goods imported into the European Union based on calculations linked to the EU’s own carbon price.
It will also incentivize EU’s trading partners to decarbonize their manufacturing industry..

Concerns:

The EU carbon measure could lead to a “rapid deindustrialization” of African countries that export to the European Union.
Another risk is that clean energy capacity in poorer countries will simply be shifted to the production of exported goods while industry aimed at local consumption relies on dirty fuels.

Climate policy overhaul

The carbon border tax is part of a wider deal that reforms the EU carbon market to cut its emissions 62% by 2030, compared to 2005.
The ETS is now extended to shipping.
- The EU carbon market, known as the Emissions Trading System (ETS), already caps greenhouse gas emissions from more than 11,000 power and manufacturing plants, as well as all internal EU flights, covering some 500 airlines.
Under the latest reforms, the quantity of free emissions allowances will be phased out between 2026 and 2034.
The Carbon Border Adjustment Mechanism will be phased in at the same time, in that way protecting domestic firms from being undercut by foreign competitors.
A new carbon market for heating and transport fuels starting in 2027, with the option to delay that by one year if energy prices remain at current high levels.