Unprecedented Carbon Tax at the Border: The EU’s Carbon Border Adjustment Mechanism

The European Parliament and EU Member States announced Tuesday morning that they have adopted an unprecedented mechanism to green Europe’s industrial imports by charging for the carbon emissions associated with their production. Commonly referred to as a „carbon tax at the border,“ the scheme will subject imports in several sectors (steel, aluminum, cement, fertilizers, electricity, and hydrogen) to the EU’s environmental standards. The mechanism is called the Carbon Border Adjustment Mechanism (CBAM) and is quite complex. Companies importing steel or cement from outside the EU will now pay for the material as well as the greenhouse gas emissions and electricity required to produce it. If such a market exists in the exporting country, the company will only pay the difference. This article discusses how ending free emission quotas could help implement this system but is causing debate within the EU about when these quotas should be eliminated.

How Carbon Border Adjustment Mechanism (CBAM) Works

The Carbon Border Adjustment Mechanism (CBAM) is a proposed policy tool that would impose a fee on imports from countries with lower carbon prices or weaker climate policies than those of the importing country. The fee would be based on the difference between the two countries’ carbon prices, and would be used to incentivize companies to reduce their emissions and transition to cleaner production processes. CBAMs are designed to ensure that all countries are held accountable for their environmental impact, regardless of where they produce their goods. By creating an economic incentive for companies to reduce emissions, CBAMs can help level the playing field for businesses in all countries and protect against unfair competition from those with weaker climate policies.
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Picture source: Jason Blackeye