Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) was recently implemented by the European Union (EU) as a response to the challenge of balancing competitiveness with the energy transition and preventing "carbon leakage." CBAM applies to imports of goods that directly or indirectly emit greenhouse gases, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen, covering more than 50% of emissions from sectors under the EU Emissions Trading Scheme (ETS). During a transitional phase, importers only need to report emissions, with payment starting in 2026. This gradual implementation aligns with the reduction of free ETS allowances to prevent carbon leakage. Other countries with emissions trading systems have expressed concerns, with China arguing that CBAM may violate WTO rules and the Paris Agreement. The EU aims to address these concerns through WTO talks while maintaining competitiveness and climate goals.

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