What is Common Border Adjustment Mechanism?
A common border adjustment mechanism (CBAM) is a specific type of cross-border adjustment mechanism that is proposed as a tool to address the issue of carbon leakage in international trade while promoting a level playing field for businesses in different countries.
The CBAM is designed to align the carbon pricing policies of countries by imposing a carbon price on imported goods based on their carbon footprint.
The CBAM is being considered by the European Union as part of its efforts to achieve its climate targets under the European Green Deal.
The idea is to introduce a system that would require importers to pay for the carbon emissions embodied in the products they import into the EU, just as EU-based producers pay for their own emissions through the EU Emissions Trading System (EU ETS) or other carbon pricing policies.
The goal of the CBAM is to create a level playing field for domestic producers who are already subject to carbon pricing policies and to prevent carbon leakage by ensuring that imported goods do not have an unfair competitive advantage over domestic products.
It is also seen as a way to encourage other countries to adopt similar climate policies and promote international cooperation in the fight against climate change.
Mechanism of CBAM
- Calculation of carbon footprint
- To determine the carbon content of an imported product, the CBAM would require the importer to provide information about the carbon footprint of the product, including the emissions generated in its production, transport and distribution.
- This information would be verified by an independent body or the importer would self-certify the carbon content, based on an approved methodology.
- Calculation of carbon price
- The carbon price that the importer would pay for the imported product would be based on the carbon content of the product and the price of carbon allowances in the country of import.
- The idea is to create a level playing field between domestic producers who are already subject to carbon pricing policies and importers of similar products.
- Payment of carbon price
- The importer would pay the calculated carbon price at the border, at the time of importation.
- The revenue generated from the CBAM would be used to support climate action or to offset the costs of EU industries that are subject to carbon pricing policies.
- Exemptions and credits
- Certain products, such as those that have already been subject to carbon pricing policies in the exporting country or those that are considered to be low-carbon, could be exempted from the CBAM.
- Credits could also be given to importers who can demonstrate that they have reduced the carbon footprint of their products through investments in clean technologies or sustainable practices.
Need for CBAM
1. Environmental effectiveness
- Carbon pricing policies are an important tool to reduce greenhouse gas emissions. However, the effectiveness of these policies can be compromised if businesses simply relocate to countries with weaker carbon regulations, resulting in carbon leakage.
- By imposing a carbon price on imported goods based on their carbon content, the CBAM can help prevent carbon leakage and ensure that the carbon pricing policies of one country are not undermined by the actions of businesses in another country.
2. Economic competitiveness
- Businesses that are subject to carbon pricing policies may face increased costs compared to businesses in countries with weaker carbon regulations. This can put domestic businesses at a competitive disadvantage and create incentives for businesses to relocate to countries with weaker regulations.
- The CBAM can help level the playing field by requiring imported goods to bear the same carbon costs as domestic goods, thereby reducing the competitive disadvantage faced by domestic businesses.4
3. International Competitiveness
- The CBAM is also seen as a tool to encourage other countries to adopt similar climate policies and promote international cooperation in the fight against climate change.
- By demonstrating that it is possible to align carbon pricing policies across countries, the CBAM can provide a model for other countries to follow and encourage more ambitious global climate action.
- The CBAM has the potential to reduce carbon leakage and promote more ambitious climate action by incentivizing businesses to reduce their carbon emissions.
- By ensuring that imported goods bear the same carbon costs as domestic goods, the CBAM can create a level playing field for businesses and encourage more sustainable production and consumption patterns.
- The impact of the CBAM on businesses can vary depending on their location and the carbon intensity of their products.
- Domestic businesses that are already subject to carbon pricing policies may benefit from the CBAM by reducing the competitive disadvantage they face from businesses in countries with weaker regulations.
- However, businesses in exporting countries may face increased costs due to the carbon price imposed on their products, potentially affecting their competitiveness.
- The CBAM could lead to higher prices for imported goods, as the carbon costs of these products are passed on to consumers. This could lead to higher inflation and reduced purchasing power for consumers.
- However, if the CBAM incentivizes businesses to reduce their carbon emissions, it could also lead to more sustainable and innovative products that could benefit consumers in the long run.
4. International Relations
- The CBAM has the potential to create tensions between countries and could be perceived as a form of protectionism. Developing countries, in particular, may be concerned that the CBAM could discriminate against their exports and create new trade barriers.
- However, the EU has stated that the CBAM would be designed to be compatible with WTO rules and would not discriminate against any particular countries or products.
- The revenue generated from the CBAM could be used to support climate action or to offset the costs of EU industries that are subject to carbon pricing policies.
- This could potentially benefit both the environment and the economy, but the specifics of how the revenue would be allocated are still being discussed.
Drawback of CBAM
1. Increases costs for businesses: Businesses in exporting countries may face increased costs due to the carbon price imposed on their products, potentially affecting their competitiveness. This could lead to job losses and harm economic growth in these countries.
2. Trade Tensions: The CBAM could be perceived as a form of protectionism, creating tensions between countries. Developing countries, in particular, may be concerned that the CBAM could discriminate against their exports and create new trade barriers.
3. Implementation: The CBAM is a complex system that requires accurate carbon accounting and monitoring. It may be difficult to accurately calculate the carbon content of imported goods, and this could lead to disputes between countries.
4. Administrative burden: The CBAM could impose an administrative burden on businesses, particularly small and medium-sized enterprises, who may lack the resources to comply with the reporting requirements.
5. Potential for fraud: The CBAM could be susceptible to fraud if businesses falsify data on the carbon content of their products. This could undermine the effectiveness of the system and create a negative perception of carbon pricing policies.
b) Harmonized carbon pricing: A third alternative is to promote harmonized carbon pricing policies across different countries, which would reduce the need for border adjustments. This could involve linking different carbon markets or adopting common standards for carbon pricing.
c) Carbon labelling: Another alternative is to introduce carbon labelling schemes that provide consumers with information about the carbon content of products. This could encourage businesses to reduce their carbon emissions and provide a market-based incentive for sustainable production and consumption.