EU Launches World’s First Carbon Border Tariff: A Game-Changer for Climate Action and Fair Trade

The European Union (EU) has initiated the first phase of the Carbon Border Adjustment Mechanism (CBAM), which is the world’s first carbon border tariff. This landmark tool is designed to place a fair price on the carbon emissions associated with the production of carbon-intensive goods entering the EU, while also encouraging cleaner industrial production in non-EU countries.

Key points about the CBAM:

1. Scope: The CBAM will initially apply to imports of specific goods and selected precursors with carbon-intensive production processes that are at the highest risk of carbon leakage. These goods include cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.
2. Transitional Phase: During this phase, importers of goods covered by the CBAM will be required to report the greenhouse gas emissions (both direct and indirect) embedded in their imports. However, they will not need to make any financial payments or adjustments.
3. Permanent System: Starting from January 1, 2026, the permanent CBAM system will be implemented. Importers will need to declare the quantity of goods imported into the EU in the preceding year and the associated embedded greenhouse gas emissions. They will then be required to surrender CBAM certificates equivalent to the embedded emissions. The price of these certificates will be calculated based on the weekly average auction price of EU Emissions Trading System (ETS) allowances, expressed in euros per tonne of CO2 emitted.
4. Purpose: The CBAM is intended to ensure that carbon-intensive imports are subject to a carbon price similar to that applied to domestically produced goods. This helps establish a level playing field for EU businesses and prevents carbon-intensive imports from undercutting domestic producers. Additionally, it aims to prevent carbon leakage, where companies move their carbon-intensive production to countries with less stringent climate policies, undermining the EU’s emission reduction efforts.
5. Global Signal: The CBAM also sends a signal to the rest of the world about the EU’s commitment to fair and equitable trade practices, particularly in the context of addressing climate change.

The CBAM is a significant step forward in the EU’s efforts to reduce its carbon footprint and meet its climate goals. It helps ensure that the carbon cost of imported goods is taken into account, fostering a more sustainable and level playing field for global trade.