Vasilij, L., Gonzalez, C., Ancygier, A. (2023): CBAM: trade implications and opportunities of EU climate neutrality goals. Discussion Paper of the 4i-TRACTION Deliverable D3.7. Climate Analytics. Berlin.

CBAM: trade implications and opportunities of EU climate neutrality goals

This paper discusses trade-related issues of the Carbon Border Adjustment Mechanism and explores its technical aspects, impact on third countries, and relation to the Paris Agreement.

It highlights policy gaps, such as the lack of financing for decarbonisation in third countries and how the Carbon Border Adjustment Mechanism (CBAM) may act as a unilateral trade barrier.

The European Union's (EU) Emissions Trading System (ETS), established in 2005, aimed to reduce the EU's greenhouse gas emissions and became the world's first international market mechanism for carbon pricing. Covering 40% of EU emissions, the sectors included in the ETS have achieved a 37% reduction in emissions between 2005 and 2021. Carbon leakage, the concern of economic activity relocating to jurisdictions with weaker climate policies, has been a key worry for policymakers. To counteract this, industries at risk of leakage were initially allocated free allowances, but the EU ETS is gradually phasing out this practice in favour of auctioning allowances.

To address carbon leakage and encourage emission reductions, the European Commission proposed the CBAM in 2021. The CBAM aims to impose a carbon price on imports of iron and steel, fertilisers, aluminium, electricity, cement and hydrogen, which have carbon-intensive production. While concerns exist about the impact on EU industries' competitiveness and the violation of the principle of Common but Differentiated Responsibilities (CBDR) in international climate governance, there are also worries about the burden on developing countries.

The European External Action Service (EEAS) and the Directorate-General for Climate Action (DG CLIMA) could play crucial roles in assisting neighbouring and developing countries in implementing carbon pricing mechanisms and effective monitoring procedures. This paper recommends creating CBAM windows within EU funding programs and proposes regular reporting and auditing of CBAM revenues to ensure transparency. The paper suggests complementary measures, including capacity building and knowledge sharing to support decarbonization efforts.