CBAM: How the EU’s Carbon Tariffs Will Impact Global Trade

Just over a year ago on October 1, 2023, the European Union’s (EU’s) Carbon Border Adjustment Mechanism (CBAM) began its transitional phase, set to be completed in 2025. CBAM is the EU’s tool for putting a fair price on carbon emitted during the production of carbon-intensive goods entering the EU, encouraging clean industrial production in non-EU countries.  

In conjunction with the EU Emission Trading System (EU ETS), the world’s first international trading system for greenhouse gas emissions, the EU’s policies will have an impact on the global market while reducing its carbon footprint. 

CBAM as an Extension of the EU ETS 

Seeing as CBAM is effectively an extension of the EU ETS, one must understand the preceding system before considering the implications of the next. The EU ETS operates on a “cap-and-trade” principle, joining regulatory limits with market incentives.  

The EU sets a limit on emissions, ideally lowering to 55% net emissions by 2030 and 0% by 2050. Each company has an emission allowance, which can be bought or sold. The system has reduced emissions linked to power and industry plants within the EU by 37%, with some even benefiting economically from the change. 

Carbon Leakage: Addressing Climate Change as a Global Issue 

As the EU ETS continues to expand its influence and further reduce carbon emissions within the EU itself, CBAM is designed to address climate change as a global issue. The EU cannot impose regulations on other countries, and this challenge has resulted in “carbon leakage.” This occurs when EU-based companies move their production efforts to countries with fewer regulations, resulting in increased carbon output for their production. CBAM aims to put a price on the carbon output of imported goods, especially for cement, iron, aluminum, steel, fertilizer, hydrogen, and electricity. 

While CBAM has promised to “level the playing field” between the EU’s carbon policy and the rest of the world, the member countries’ trade partners are unsatisfied with the policy. 

Most notably, the World Trade Organization cited concerns that CBAM’s introduction may create trade barriers that fall more heavily on certain countries. European companies have been subject to gradual rises in carbon emissions prices and free allowances which are slowly being phased out, CBAM is moving much more quickly. 

How to Support Developing Countries? 

As a result, it has been argued that, if the EU wishes to push climate policy on the global stage, it will need to provide support for developing countries to move toward decarbonization. Developing countries lack the existing infrastructure to push a carbon-neutral stance, while Western nations have had the privilege of starting with existing industries.  

Some have proposed that the EU should use the revenue it receives from CBAM to support decarbonization in less developed or developing countries. 

Impact on Industrialized Economies 

Regardless, it would seem the countries that will feel the impact most are large economies, namely China, Türkiye, Russia, the United Kingdom, and the United States. Though they have the economies to implement their own carbon reduction initiatives, such as the United States has been doing with the Inflation Reduction Act, CBAM will still have an economic impact. Emerging economies like India, Vietnam, and Brazil will likely require some level of support to meet the emissions requirements put forward by CBAM. 

That said, the initiative has created intergovernmental conversations concerning trade and climate initiatives, with discussions even appearing in the United States Congress between 2021 and 2023. The WTO has suggested that it may advance an international carbon pricing system that would allow for regional differentiation, with lower carbon prices in the global south. 

Requirements for Importers 

Moving forward with CBAM, businesses will be required to calculate direct and indirect emissions and verify this data through a certified test center. They will then need to acquire CBAM certificates from a relevant authority and file an annual CBAM declaration by May 31. 

Carbon data will be essential for businesses to monitor, verify, and report, regardless of the country. EU importers will have to declare the emissions embedded in their imports, and will therefore work with businesses that report their carbon output accurately and reliably. 

The Future Impact of CBAM 

While CBAM is still in its transitional phase, the impact is already being felt on a global scale. The supply chain is subject to new regulations that must be addressed, and certain businesses may be disproportionately affected by the policy. Addressing global climate change is essential for a green future, but it remains to be seen whether CBAM will be the way forward.