The CBAM Effect: the world's response to the EU’s climate stick
The EU is currently in the process of legislating for a levy on carbon-heavy imports. The so-called Carbon Border Adjustment Mechanism (CBAM) will affect goods imports for a number of industrial sectors, including iron and steel, cement, fertiliser, aluminium and electricity generation. This will be the first EU policy to explicitly affect industry emissions in third countries, rather than emissions only from industries within the EU. The innovative mechanism is still under development but has already attracted a lot of attention and responses from EU trading partners. In order to identify the potential of CBAM as an instrument of climate diplomacy, this Alert discusses initial responses to CBAM by several important EU trading partners. It concludes that CBAM has already had a positive effect on trading partners’ climate policies. However, the EU needs to continue to engage its trading partners in the further development and implementation of the mechanism. While it might feel natural to focus on the EU’s most important trading partners, it is important not to lose sight of CBAM’s impact on vulnerable economies and their continued support for the EU in their production costs and potentially harming competitiveness and their global market share. The pace at which CBAM will replace the free allowances has not yet been clearly defined.
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