What is the Carbon Border Adjustment Mechanism (CBAM)?

The carbon adjustment mechanism is a system developed to reduce or offset carbon emissions. This mechanism encompasses a set of processes, including the monitoring, reporting, and verification of carbon emissions.

The European Union (EU) already regulates domestic producers’ carbon emissions through carbon pricing mechanisms and carbon taxes. However, these measures have not been fully effective in reducing emissions and have led to “carbon leakage,” where production moves to countries outside the EU that do not impose carbon taxes. To prevent this and maintain the competitiveness of European producers, the EU has decided to regulate carbon emissions at its borders. The main goal is to prevent carbon leakage and protect the competitiveness of EU industries.

As part of the Green Deal Action Plan, the Carbon Border Adjustment Mechanism (CBAM) has been introduced as a mechanism equivalent to the EU Emissions Trading System (ETS). Since 2005, the ETS has been applied within the EU, and CBAM is designed to apply equivalent carbon prices to imported products. This ensures that production in countries with less stringent climate policies does not lead to carbon leakage.

Through this mechanism, products imported into the EU will bear costs equivalent to the carbon costs of similar products produced within the EU. Importers of specific sectoral products must obtain CBAM certificates based on the greenhouse gas emissions associated with their imported products.

Initially, CBAM covers high-carbon-leakage-risk sectors: cement, aluminum, fertilizers, hydrogen, electricity, and iron & steel. Companies in these sectors must calculate and report their greenhouse gas emissions related to production and trade. This encourages clean production both within and outside the EU and maintains the competitiveness of EU manufacturers. The CBAM regulation’s reporting obligation will begin on October 1, 2023, with financial obligations starting January 1, 2026, covering Scope 1, Scope 2, and Scope 3 emissions.

The Importance of the Carbon Border Adjustment Mechanism

The carbon adjustment mechanism plays a significant role in combating climate change. Global warming and climate change cause ecosystem degradation, reduced water resources, declining agricultural productivity, and depletion of economic resources. CBAM is an effective tool to address these issues and promote a sustainable future.

The mechanism aims to achieve a 62% reduction in greenhouse gas emissions by 2030 compared to 2005 levels. Emissions will be allocated by sector and product, tied to a certification system, and imports will only be allowed from authorized companies with the relevant allocations. This increases the carbon cost burden on companies, incentivizing them to adopt green production technologies.

CBAM also encourages producers outside the EU to reduce their emissions and creates a potential revenue stream to support climate change initiatives. Economically, carbon reporting, certification, and trading can boost growth, generate jobs, and accelerate the green transition.

Despite its benefits, CBAM faces challenges such as insufficient financing, limited technological infrastructure, and lack of international cooperation. However, these obstacles can be addressed to further improve the mechanism.

Fundamentals of the Carbon Border Adjustment Mechanism

Understanding the basics of CBAM is crucial to grasp how the system works. Key components include carbon emissions measurement, CBAM projects, and carbon credits.

Carbon Emissions MeasurementCarbon emissions result from the release of greenhouse gases into the atmosphere, including CO₂, CH₄, and NOₓ, from energy production, transportation, industry, and agriculture. Measurement is expressed in CO₂ equivalents (carbon footprint).

• National level: Countries prepare greenhouse gas inventories to track emissions across sectors.

• Corporate level: Companies calculate direct and indirect emissions from operations, including energy use, transportation, production, and supply chains.

Standards such as IPCC guidelines and ISO 14064 ensure consistent measurement and reporting.

How CBAM WorksCBAM integrates with the ETS, setting a carbon cap and allocating allowances. Companies must surrender allowances equal to their annual emissions. Those emitting less can sell excess allowances, earning revenue. Importers pay fees on products based on their carbon content, preventing carbon leakage.

Key principles include:

• Emission reduction: Focus on reducing emissions via green technologies.

• Verification and certification: Annual reports are verified and certified by accredited third parties.

• Carbon allowances: Companies are allocated allowances based on emissions; excess can be sold, while deficits require purchasing offsets.

• Carbon offsetting: Allows balancing emissions from one location with reductions elsewhere.

• Embedded emissions: Post-transition, emissions from inputs in complex products must be reported.

CBAM Emission Scopes

• Scope 1: Direct emissions from production processes, including heating and cooling.

• Scope 2: Indirect emissions from electricity used in production.

• Scope 3: Indirect emissions from inputs included in CBAM-listed products.

Importers must obtain emissions data from producers to report and, from 2026, verify it via accredited verification bodies within the EU.

Key Sectors Under CBAM

High carbon-leakage-risk sectors include:

• Cement: HS codes 2523.10.00, 2523.21.00, etc.

• Fertilizers: 2808.00.00, 2814, 2834.21.00, etc.

• Iron & Steel: HS code 72 (except 7202 & 7204), 7301, 7302, etc.

• Aluminum: HS codes 7601–7616

• Electricity: HS 2716

Benefits of the Carbon Border Adjustment Mechanism

Environmental Benefits:

• Reduces carbon emissions

• Protects natural resources by promoting circular economy practices

• Improves air quality

Economic Benefits:

• Creates new jobs in renewable energy, energy efficiency, and waste management

• Provides competitive advantage through carbon allowance trading

• Lowers energy costs via efficiency improvements

Future and Challenges

CBAM is expected to play an increasingly important role in combating climate change. Its future depends on:

• Technological innovation: Renewable energy, energy storage, and carbon capture will enhance CBAM effectiveness.

• International cooperation: Global agreements, such as the Paris Agreement, strengthen CBAM implementation and encourage emission reduction commitments worldwide.

Despite challenges, CBAM is a crucial tool for promoting sustainability, incentivizing green technologies, and ensuring fair competition in global markets.