Carbon Border Adjustment Mechanism (CBAM): What you Need to Know

Carbon Border Adjustment Mechanism
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The EU aspires to be a worldwide leader in fighting against climate change. Therefore, various policies pertain to climate neutrality. EU set a target of a 55% reduction in carbon emissions by 2030 compared to 1990 levels. Climate change is a global issue that needs a global solution. Communication and standardization are keys. The Carbon Border Adjustment Mechanism (CBAM)  –  the alter ego of ETS – is one of those measures. Its goal is the prevention of carbon leakage or its risk of it and. CBAM is a climate mitigation measure that strives to ensure WTO’s compatibility.

The basics

EU has high standards regarding its climate policy. So, it is quite clear that the risk of carbon leakage is evident. Companies with their headquarters in the EU may move their facilities abroad to a “carbon-friendly” state, or the customers could prefer foreign, cheaper, and “dirtier” products. Such carbon leakage could move outflows exterior of the EU and thus genuinely weaken EU and worldwide climate endeavors. The CBAM will level the cost of carbon between residential items and imports and guarantee that the EU’s climate goals are not undermined by other nations’ less ambitious policies.

Carbon Border Adjustment Mechanism (CBAM)
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How does it work?

Outlined in compliance with World Trade Organization (WTO) rules and other worldwide commitments of the EU, the CBAM framework will function in a certain way. EU importers will purchase carbon certificates. Equal to the carbon cost that would have been paid, had the merchandise been created under the EU’s climate law. Then again, once a non-EU maker proves that has already paid a cost for the carbon utilized in a third nation, the relevant cost will be deducted. The CBAM will aid in diminishing the chance of carbon leakage by empowering producers in non-EU nations to green their generation forms. California could be a case study regarding the measure’s efficiency. The implementation of CBAM is going to be gradual and applied to selected goods: iron and steel, cement, fertilizer, aluminum, and electricity generation.

sectors covered by the CBAM
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Carbon Border Adjustment Mechanism CBAM vs ETS

The EU Emissions Trading System is the flagship of the EU policy, aiming to tackle climate change. It is the EU’s key mechanism to diminish greenhouse gas emissions cost-effectively while ensuring its sustainability. It sets a cap on the sum of greenhouse gas emissions that industrial installations emit. Allowances shall be bought on the carbon market, even though a certain number of free allowances were distributed. ETS is one of the most effective EU strategies. Lawmakers and EU leaders aspire to make CBAM an alternative to ETS.

The basis of CBAM will be a framework of certificates to cover the inserted outflows in items imported into the EU. The CBAM does not follow the ‘cap and trade system. Instead, the CBAM certificates reflect the ETS price. The two measures will go hand in hand to equalize the EU and non-EU companies. The CBAM will only be applicable to the share of emissions that do not qualify for free permits under the EU ETS until they are completely phased out in 2035, ensuring that imports and EU producers are treated equally.

The CBAM will be analogous to the ETS in that importers must buy certificates for the system to function. The cost of the certificates will be determined based on the EU ETS allowances’ weekly average auction price. The latter is expressed in euros per tonne of CO2 emitted. Importers of the items must register with national authorities where they can also purchase Carbon Border Adjustment Mechanism certificates, either directly or through an agent.

Local Authorities

The scheme will be authorized by national authorities, who will also examine and validate declarations. Additionally, they will be in charge of providing importers with CBAM certificates. The number of goods and embedded emissions in those goods that were imported into the EU in the previous year must be declared by the 31 May of each year in order to import goods covered by the CBAM. They must also hand over the CBAM certificates they have pre-purchased from the government.

To conclude, CBAM would provide fair treatment for goods created in the EU and imports from abroad by ensuring importers pay the same carbon price as local producers under the EU ETS and prevent carbon leakage. It is evident that fighting climate change is a global problem and aggregate solutions are in order.

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