A CBAM is a tariff or similar import mechanism intended to reduce carbon leakage and protect domestic industry from foreign competition in countries with weaker or no carbon pricing. A CBAM is only appropriate for countries with a carbon pricing system in place, either through a domestic carbon tax or an emissions trading scheme. The European Union remains the only country or customs union with a carbon pricing program in place, under its Emission Trading Scheme (ETS). Technically, the United Kingdom states it is establishing its own carbon pricing scheme now that it has left the EU. Other countries have carbon pricing proposals, but they remain in the planning phase.
In March 2020, the European Commission produced an Inception Impact Assessment for a CBAM that announced “[an] implementation plan will be prepared together with the legislative proposal.”
On September 16, 2020, European Commission President Ursula von der Leyen announced that a legislative proposal on the CBAM would be among key 2021 initiatives.
On September 30, 2020, the European Roundtable on Climate Change and Sustainable Transition published a paper entitled “Border Carbon Adjustments in the EU Issues and Options.” The paper presents four key objectives of a CBAM: “(1) Limiting emissions leakage; (2) Protecting against reduced competitiveness of domestic industries; (3) Incentivising foreign trade partners and foreign producers to adopt measures comparable/equivalent to the EU’s; and (4) Yielding revenue that can be used to fund investments in clean technology innovation and infrastructure modernisation or as international climate finance.”
On October 7, 2020, the European Commission’s Committee on the Environment, Public Health and Food Safety (ENVI) published a report entitled “Towards a WTO-compatible EU carbon border adjustment mechanism.” The report noted a CBAM is a complementary necessity for the EU ETS. Among other things, the report contends a CBAM would “not be per se incompatible with WTO rules;” states that although a CBAM should cover all imports, initially it should cover a narrower list of sectors, specifically the “power sector and energy-intensive industrial sectors like cement, steel, chemicals and fertilisers;” and supports the use of revenue collected under the CBAM for the EU’s budget and climate finance for countries most vulnerable to climate change. The report suggested that the CBAM “must come into effect as soon as possible and by no later than 2023.” The EU will now continue to design its CBAM for possible implementation.