The European Union has been ramping up its climate action efforts, adapting rapid pace in climate negotiations. Earlier this month, it voted to approve a deal to reform the EU’s carbon market to cut emissions by 62% from 2005 levels by 2030. This mechanism has helped reduce power plant and factory emissions by 43% since 2005 and will phase out free CO2 permits to factories by 2034.
Along with the phasing out of free carbon allowances, the EU will phase in another ambitious policy – the Carbon Border Adjustment Mechanism (CBAM), aimed at levelling the playing field between EU and non-EU manufacturers.
The EU argues that while it pursues emission reduction plans, the existence of weaker climate policies in other countries poses the risk of what is called ‘carbon leakage’.
Carbon leakage is when companies, in order to meet climate policy requirements or to avoid carbon restrictions in their home country, relocate the production or manufacturing of carbon-intensive materials to countries with less strict climate rules.
In order to prevent this and reach other climate goals, the EU in 2021, created a proposal for a Carbon Border Adjustment Mechanism (CBAM).
The CBAM plans to impose a tariff on a set of carbon-intensive imports, which will have to be paid by EU importers and companies who export such products to EU countries.
The CBAM initially plans to impose a carbon border tax on the most carbon-intensive imports – iron and steel, fertilizers, cement, aluminum and electricity. The CBAM will start phasing in from October 2023, first requiring EU importers to collect data about the number of metric tons of carbon dioxide released during the manufacture of the goods they import.