The Carbon Border Adjustment Mechanism
On October 1, 2023, the EU Carbon Border Adjustment Mechanism (CBAM) came into effect. The EU CBAM aims to limit carbon leakage and complements the European Emission Trading System (EU ETS) by establishing a carbon price on imported goods that is equivalent to the carbon price on domestically EU-produced goods. Under the EU ETS, regulated entities that are subject to the risk of carbon leakage receive emission allowances free of charge conditional on their emission intensity in relation to a sectoral benchmark. This way, the competitive disadvantage of European climate policy is mitigated. The distribution of free allowances is phased out until 2034 and CBAM serves as a substitute to reduce the risk of carbon leakage for EU’s industry from there on.
CBAM introduces reporting obligations for importers of certain goods into the European Union. Ultimately, this emission data needs to come from the manufacturers and traders of the goods from non-EU countries. Stakeholders and companies need to prepare for this new compliance mechanism in international trade.