The EU Carbon Border Adjustment Mechanism: A Guide for Businesses
The European Union's Carbon Border Adjustment Mechanism (CBAM), a tax on carbon-intensive imports like steel, has raised concerns about the potential fragmentation of global trade.
This article discusses how the EU Carbon Border Adjustment Mechanism (CBAM) regulation and measures aim to limit emissions and create a level playing field for European companies. Outside the EU, the CBAM has sparked fears of trade disruptions and retaliation from countries such as China, India, and Turkey.
International focus on the EU CBAM
Interviewed by the Financial Times on the 9th of January a management consultant based in China explained that “Companies are watching this keenly; they are concerned that there will be many other countries — [most importantly] the US and Japan — taking on similar measures.” The EU justifies CBAM to prevent "carbon leakage" and to achieve the EU’s legally binding climate objectives in the EU Green Deal.
What is the EU Carbon Border Adjustment Mechanism (CBAM)?
The EU CBAM represents significant global climate policy development, balancing economic competitiveness and environmental imperatives. As part of the European Green Deal, CBAM aims to prevent carbon leakage and align international trade with the organisation's climate goals. Its importance is underscored by data from the World Bank, highlighting the role of such initiatives in the international fight against climate change.
How does the EU carbon border adjustment legislation work?
The CBAM is integral to the success of the European Green Deal and complements the extension of the EU Emissions Trading System (ETS), which is part of a global trend towards carbon pricing mechanisms. It incentivises global industries to adopt sustainable practices, aligning with efforts to reduce carbon emissions.
The impact of the carbon border adjustment mechanism on European businesses
European businesses, particularly in sub-sectors like cement and steel, must adapt to CBAM. This adaptation reflects a global shift towards carbon regulation and taxation being used to drive the transition to a low-carbon economy.
What are the Goals and Targets of the EU’s Carbon Border Adjustment Mechanism?
CBAM supports the EU’s goal of climate neutrality by 2050 and aims for a 55% reduction in emissions from 1990 levels by 2030. These targets align with the World Bank’s advocacy for an aggressive approach to climate action.
What risks does CBAM pose to international trade?
While some parties outside of Europe have called the CBAM a form of “Green Market Protectionism’,“ the EU cannot implement mandatory carbon reporting and reduction on companies within the EU if they do not take measures to balance the regulation for imported goods. However, given the current state of geopolitics, CBAM may lead to trade disputes and compliance challenges for exporters to the EU.
What is the timeline for the full implementation of EU CBAM?
The phased approach, starting in 2023 and moving towards full implementation by 2026, reflects the urgency for climate action. The focus on energy-intensive industries aligns with World Bank findings, highlighting sectors most responsible for global emissions.
Conclusion
The introduction of CBAM has led to discussions about the necessity of a global carbon price to encourage businesses to reduce emissions. While some nations contemplate carbon border taxes, the absence of common product definitions and guidelines remains the main challenge for producers and manufacturers. This is a repeat of what companies have been through with various ESG metrics and reporting standards that set sustainability goals.
More about Martello and the Carbon Stream Map
Martello is a professional services business with a highly experienced team that reduces carbon and climate liabilities and business risks for organisations responding to the EU Green Deal and Net Zero regulation.
We developed the Carbon Stream Map to provide businesses and investors with a highly visual and agile approach to identify all the critical operational scopes 1,2 and 3 emissions within one operation or down a supply chain that create costs and business risk.
With our extensive global experience in aviation, oil & gas, mining, manufacturing, transport, marine, FMCG, agriculture, low carbon, financial & professional services sectors, we can measure any global business or supply chain in any industry.
The Martello Carbon Stream Map reduces regulatory and compliance risk by preparing the detailed baseline metrics companies need to respond and comply with mandatory carbon legislation, including the Corporate Sustainability Reporting Directive (CSRD), Carbon Border Taxation and the increasing pressure on businesses to measure scope three supply chain carbon.
Using the Carbon Stream Map, we ensure our clients can navigate and meet mandatory and voluntary requirements of net zero, ESG, TCFD, and TNFD reporting and disclosures.
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