On October 1st, 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) began its transitional phase, with reporting requirements starting in October 2023 and full charges scheduled for implementation by 2026.
The CBAM was introduced as part of the European Green Deal in 2019 and officially adopted in May 2023 after four years of extensive negotiations with the European Commission, Member States, and the European Parliament. Its primary objective is to ensure a level playing field for European companies that already bear the costs of their CO2 emissions related to production. It aims to achieve this by imposing a tax on EU importers equivalent to the difference between the EU’s carbon price and the carbon price in the country of origin (if applicable). The non-EU producers can offset the CBAM costs if their countries have a carbon tax. The measure will initially affect cement, iron, steel, aluminum, fertilizers, and electricity imports, ant it implies that importers and manufacturers must quantify their emissions to comply with the CBAM.
Climate activists in developed countries are enthusiastic about it, despite a UN study finding that the emission reductions achieved by the carbon border adjustment mechanism are relatively modest compared to global CO₂ emissions. Elsewhere, this mechanism has faced significant criticism, with critics viewing it as a protectionist measure that could harm the EU’s main trade partners and poor countries.
Can the EU’s Carbon Border Adjustment Mechanism Work?
Since 2005, the EU has imposed a carbon price on its heavily polluting industries, requiring them to buy credits for their carbon emissions or face fines. Businesses get some free allowances but must pay around €80 ($75) per metric ton to emit more carbon—one of the highest carbon charges globally. With the CBAM, the EU aims to export this carbon price globally and push other countries to establish their carbon pricing to deal with carbon leakage, to avoid that EU companies relocate to areas with less stringent regulations or replace EU products with imports from regions with less strict carbon regulations.
The European Commission estimates that CBAM will reduce CO2 emissions by 1 percent within the EU and by 0.4 percent globally in 2030 for the covered sectors. It also predicts a 29 percent decrease in carbon leakage by 2030. However, the Commission acknowledges that the projections are not very reliable. For example, California’s carbon border tax on electricity imports in 2018 resulted in a re-shuffling of resources: low-emissions products were directed to carbon-regulated markets, and more carbon-intensive products were diverted to unregulated markets. In brief, positive environmental impacts are not guaranteed.
Furthermore, the measure has sparked strong opposition from major trading partners concerned about paperwork and business impact. Brazil, South Africa, and India have criticized the tax as discriminatory. India is now planning its carbon tax targeting EU exports, China has asked the World Trade Organization to review the measure, Australia has strongly criticized it for its perceived negative impact on global growth, and the U.S. is seeking an exemption. Producers and trade associations in the EU are concerned about potential losses of market shares in case of retaliatory actions from other countries.
On a different note, only a small percentage of European businesses met the initial deadline for reporting their carbon-intensive imports, highlighting the difficulties in implementing the CBAM on such products starting in 2026. In countries like Germany and Sweden, fewer than 10 percent of the anticipated 20,000 companies have submitted their emission reports within the specified timeframe. Non-compliant businesses face fines of €50 per ton of emissions starting mid-July.
EU importers will soon encounter higher costs and additional administrative burdens due to the CBAM. It will cost companies up to €27 million annually for administration. Many companies and trade bodies argue that the real costs are unpredictable due to the extensive paperwork and contractual changes required. Most surveyed businesses (80%) expect to raise consumer prices to offset the levy.
CBAM’s Impact on Least Developed Countries
According to an EU study, 33 African countries out of 46 least-developed countries (LDCs) contribute less than 0.1 percent to EU imports of fertilizers, cement, iron, and steel. Their CO2 impact is thus minimal. However, these industries are vital for employment and income in LDCs.
A joint study between the LSE and the African Climate Foundation estimated that the CBAM would lower Africa’s GDP by 0.5%, and substantial reduce exports to the EU: aluminum (down by 13.9%), iron and steel (8.2%), fertilizer (3.9%), and cement (3.1%). To illustrate, the annual losses from the border tax are three times the EU’s 2021 development cooperation budget for Africa, which was €6.3 billion (US$6.8 billion).
Carbon-intensive sectors like steel, aluminum, and fertilizers are crucial for development in construction and agriculture. Taxing these industries could disproportionately impact weaker economies, affect their profit margins and hinder the scaling up of renewable energies that rely on products like cobalt, steel, and aluminum, unfairly distributing the burden of climate mitigation to poor countries.
Higher taxes for manufacturing firms could lead to job cuts or closures, potentially resulting in significant job losses. This situation could exacerbate current inequalities and raise poverty levels in the regions affected.
Photo by Renaldo Matamoro
