What is the carbon boundary adjustment mechanism

The European Union (EU) has announced the implementation of its Carbon Border Adjustment Mechanism (CBAM) from October 2023, which will introduce a carbon tax on products that are not environmentally sustainable imported into the EU. The tax will range from 20 to 35 % and will be levied on selected imports from 1 January 2026.

What is the Carbon Boundary Adjustment Mechanism?

CBAM is a policy tool put in place by the EU to reduce carbon emissions by imposing a carbon tax on imported products, ensuring they are subject to the same carbon costs as products produced in the EU. It is part of the EU's "Fit for 55 in 2030" package to reduce greenhouse gas emissions by at least 55 % by 2030 compared to 1990 levels. The goal of CBAM is to prevent imports with high CO2 emissions from undermining the EU's climate goals and to encourage the adoption of cleaner production practices worldwide. To implement CBAM, importers will have to declare the amount of imported goods and their greenhouse gas emissions each year. To compensate for these emissions, they will have to hand over the corresponding number of CBAM certificates and the price of these certificates will be based on the weekly average auction price of EU Emissions Trading System (ETS) allowances in EUR/ton of CO2 emitted. It encourages non-EU countries to adopt stricter environmental regulations, reduce global carbon emissions and prevent carbon leakage by discouraging companies from moving to countries with weaker environmental regulations.  In addition, CBAM revenues will be used to support EU climate policies that can serve as an example for other countries to promote green energy. (Pooja Yadav)