As the CBAM Experiment Begins all Eyes are on Europe
It's been over a year since the EU began its CBAM transitional period, but there is still a long way to go before we can determine whether the new trade policy will be a long-term solution to the issue of taxing carbon.
In the fight against climate change and the rise of greenhouse gas emissions, countries have looked for solutions to slow the increase in carbon output. Now, they are turning to a new system of quantifying and disincentivizing certain goods.
The CBAM, or carbon border adjustment mechanism, is the EU's attempt at putting a fair price on carbon emissions while preventing carbon leakage. Imposing taxes and tariffs on domestic carbon emitters and importers has been tricky due to a lack of equity. Taxes imposed on domestic companies drove carbon leakage, meaning that it prompted businesses to move their operations to foreign soil to avoid the tax. At the same time, tariffs prescribed to imported goods threatened the WTO's mandate of equal treatment for foreign and domestic goods.
CBAM attempts to marry the two taxes, ensuring equity between foreign and domestic goods while upholding the WTO rules. The EU Parliament adopted CBAM in May of 2023, and the transitional phase began in October of that same year. During the transitional phase, companies that produce CBAM goods are required to submit a quarterly report containing quantities of CBAM goods imported, the embedded direct and indirect greenhouse gas emissions, and the carbon price due in the country of origin.
CBAM will target goods in high-carbon industries such as iron, steel, aluminum, fertilizers, and cement. In conversation with Alayna Tria, Associate Director at BRG, she mentioned that, from an economic standpoint, CBAM is the most efficient way to curb a country's carbon emissions. Tria emphasized that ensuring accurate data collection is one of the biggest hurdles to overcome in this transition period. To ensure that CBAM taxes are equitable and meet WTO rules, the number of goods imported and their embedded greenhouse gas emissions, both direct and, if applicable, indirect, need to be quantified and balanced with domestic goods, which also need to be quantified. The necessary data collection, she says, is a massive undertaking.
CBAM has been met with some pushback. Firstly, it has been criticized for leaving room for uncertainty in carbon accounting. Measuring emissions is not an easy task, and critics argue that there is yet no clear methodology for calculating embedded carbon, even at the factory level. A coalition of nations, led by China and India, also argue that CBAM will unfairly affect them and serve the special interests of those who can afford the tax. The group, which includes South American and African nations, argues that they will be disproportionately affected and that tariffs weaken decarbonization.
As CBAM unfolds in the EU, nations from around the globe will be watching, particularly in America, where a new administration favoring tariffs could view the tougher trade policy as an effective model. CBAM regulations will go into full effect on January 1, 2026, when importers will be required to obtain authorization to import CBAM goods and declare the quantity and embedded greenhouse gas emissions of goods yearly. A full roll-out of CBAM is planned for 2034.
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