What is CBAM and Why Do We Need it?

The Carbon Border Adjustment Mechanism, or CBAM, is a proposed policy initiative by the European Union (EU) aimed at addressing the risk of carbon leakage associated with uneven climate policies across jurisdictions.

CBAM seeks to ensure that imported goods are subject to the same carbon pricing mechanisms as those produced domestically, thereby preventing the relocation of carbon-intensive industries to regions with weaker environmental regulations. In essence, CBAM serves as a carbon tariff, levying charges on imports based on their embedded carbon content.

‍The need for CBAM arises from the recognition of carbon leakage as a significant challenge in the transition to a low-carbon economy. As countries implement ambitious climate targets and carbon pricing mechanisms, there is a risk that industries may relocate to jurisdictions with less stringent regulations, undermining global efforts to combat climate change.

CBAM addresses this risk by internalizing the carbon cost of imported goods, leveling the playing field for domestic producers while incentivizing global adoption of cleaner technologies and practices.