Discussions at COP29, once again, have highlighted the instrumentalisation of the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) by global south countries and in particular the BRICS, clouding the negotiations, serving as a bargaining chip that obstructs or hinders progress in other areas. The efforts to include unilateral trade measures in the agreed agenda are proof once again that the CBAM suffers from a global perception problem.
The EU is a net importer of the industrial goods covered by the CBAM, including iron and steel, aluminium, cement and fertilisers. The EU imports more of these goods than it exports, leading to a trade deficit in these sectors. European industry does not want to stop imports of these goods, nor does it have the capacity to overturn this trade deficit.
CBAM has therefore been designed as a World Trade Organisation (WTO) compatible environmental measure. CBAM is neither a trade barrier nor a trade measure and the data from the first four reporting quarters under the CBAM Transitional Period Regulation demonstrate this.
Given that the EU has a strong and long-lasting demand for these industrial goods and has ambitious climate objectives, namely climate neutrality by 2050, imports of these goods need to support their climate efforts, not undermine them. The CBAM aims to address the risk of carbon leakage for carbon-intensive goods, ensuring that: (a) the embedded carbon emissions for imports are measured the same way it is done for EU production and (b) imported products are subject to the same carbon cost as those produced within the EU. There is no discrimination between imported goods and locally produced goods ensuring thereby full WTO compliance.
As all Parties at COP29 increase their ambition for decarbonisation, all countries will face carbon leakage risks. This is not due to the EU CBAM’s lack of equal global action towards emissions abatement. CBAM encourages climate action, in particular the development of carbon pricing. As shown by the EU Emissions Trading System (ETS), carbon pricing can be one of the most powerful tools to help countries reduce emissions and raise much-needed revenues. Further, the CBAM will take into account and deduct from the financial obligation any carbon price effectively paid by third-country operators. This principle set in CBAM regulation ensures that the instrument is fair and that there is no discrimination: if a carbon price was already paid on the emissions declared for CBAM, it should not be paid twice.
The definition of the CBAM Regulation essentially covers any compliance schemes, in the form of carbon taxes explicitly levied on the carbon content and binding emission trading systems. Carbon credits purchased on a purely voluntary basis are currently not covered by this definition. However, most compliance schemes allow for at least part of the obligation to be met with the purchase of carbon credits, either on a domestic or international market. A Review of the CBAM Regulation will take place in 2025 to take into account any lessons learnt from the transition period. Statistics and results will be shared with third countries and the private sector. Expert groups are preparing to implement acts and guidelines, which are already available to industry, civil society and third countries, using a uniquely transparent approach. The modification to the CBAM regulation is planned in 2025 to reduce the administrative burden, particularly for SMEs along with other simplifications.
CBAM is not designed to generate revenues – expected revenues from CBAM are approximately 2 billion euros by 2028. The combined EU and member state financing for Least Developed Countries runs in multiple billions per annum. In 2023 alone, the EU and its Member States again contributed 28.6 billion euros to climate finance. It is expected that revenues from CBAM may reduce over time as the carbon intensity of the imported goods also decreases and third countries introduce or increase their carbon price.
The CBAM is designed to deal with a world in which different Parties to the Paris Agreement on climate change have taken on different levels of ambition to reduce emissions, under the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC), including through their Nationally Determined Contributions (NDCs). The principle of CBDR-RC does not require or even allow Parties to the Paris Agreement to lower domestic environmental standards to account for the circumstances of each and all third countries.
As a developed Party to the Paris Agreement, the EU has demonstrated leadership, with ambitious climate policies, including a commitment to reach climate neutrality by 2050. In this context and with its reinforced ETS and through the CBAM, the EU must also ensure that its ambitious policies do not lead to a rise in emissions elsewhere.
