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The future for global trade in a changing climate


What to know about the implications of the EU’s Carbon Border Adjustment Mechanism on international trade.

Countries are increasingly linking climate and trade with measures like the US Inflation Reduction Act and EU Carbon Border Adjustment Mechanism (CBAM) although other countries have critiqued these measures including at COP27. However, the EU maintains that the CBAM will only minimally impact trade while simultaneously leveraging further climate action. As the design of CBAM is being negotiated, with the trial period beginning in early 2023, what should we know about CBAM?

What is it?

The EU Green Deal raises concerns that higher carbon prices and industry standards could make emissions-intensive and trade-exposed industries like cement, aluminium, iron and steel less competitive in international markets. This could result in ‘carbon leakage’ where dirtier production abroad replaces EU industry and global emissions increase.

Until now the EU’s solution to carbon leakage was to give these industries free allowances under the Emissions Trading System (ETS). The steel sector alone makes up 5 per cent of the EU’s emissions and was issued around 2.3 billion in emissions allowances for free from 2008-19.

The CBAM is a new approach to carbon leakage, aiming to create a ‘level playing field’ by charging a fee on carbon at the border, which would go to the EU budget. It is roughly equivalent to the ETS applying to goods entering the EU unless the producer has already paid for carbon at the location of production. The policy is under negotiation between the European Commission, European Parliament and European Council and the pilot phase of emissions tracking without enforcing fees should begin in early 2023.

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