CBAM (Carbon Border Adjustment Mechanism)

The CBAM proposal is a significant step towards achieving the EU’s climate goals, which include reducing GHG emissions by at least 55% by 2030. It was introduced by the European Commission in July 2021 and entered into force in May 2023. In this blog, we will discuss the key features of CBAM, how it works, and its potential impact on businesses and trade.

CBAM was devised to address the issue of carbon leakage, which is when companies relocate their operations to countries with lax environmental regulations to avoid the cost of complying with their home country’s climate policies. Shifting production to countries with lower climate standards can lead to an increase in global GHG emissions. Carbon leakage also puts EU industries that have to comply with climate policies at a disadvantage.

Impact of CBAM in global trading

The CBAM proposal is expected to have a significant impact on carbon pricing and emissions trading in the EU. By requiring importers to purchase carbon certificates to cover the emissions associated with the production of imported goods, CBAM would create a new demand for carbon certificates and potentially increase the price of carbon in the ETS. In this regard, CBAM is expected to contribute to reducing GHG emissions and mitigate the impacts of climate

A Carbon Border Adjustment Mechanism (CBAM) can significantly impact global trading in several ways:

1. Competitive Imbalance: Implementing a CBAM can create a competitive imbalance between countries with varying carbon pricing policies. Countries with stringent carbon regulations may face higher production costs compared to those without such regulations. This can lead to trade distortions, as products from countries with lower carbon pricing could become cheaper in international markets.

2. Trade Disputes: CBAMs may trigger trade disputes between countries, particularly if they are perceived as protectionist measures aimed at favoring domestic industries over foreign competitors. Countries subjected to CBAMs may argue that they are being unfairly penalized for their carbon emissions, leading to potential conflicts within international trade agreements.

3. Supply Chain Adjustments: To avoid CBAM-related tariffs, exporters may adapt their supply chains by either reducing carbon emissions in their production processes or by relocating production to countries with lower carbon pricing. This could lead to shifts in global supply chains and production patterns.

4. Impact on Developing Countries: Developing countries, which may have less stringent environmental regulations, could face challenges in complying with CBAM requirements. This might hinder their export competitiveness and impede their economic development.

5. Encouraging Carbon Reduction: On the positive side, CBAMs can incentivize countries to reduce their carbon emissions by imposing costs on carbon-intensive imports. This may encourage global adoption of more environmentally friendly production methods and technologies.

6. Complexity and Administrative Burden: Implementing CBAMs requires complex monitoring, verification, and enforcement mechanisms to accurately assess the carbon footprint of imported goods. This could impose administrative burdens on both exporters and importers, potentially increasing transaction costs and bureaucracy in global trade.

Overall, while CBAMs have the potential to address carbon leakage and promote carbon mitigation efforts on a global scale, their implementation involves challenges and may have significant implications for international trade dynamics. Balancing environmental objectives with trade considerations will be crucial in designing effective CBAM policies that minimize trade distortions and foster sustainable economic growth.

Reference

https://www.terrascope.com/en-gb/blog/cbam-a-guide-to-understanding-the-cross-border-adjustment-mechanism

https://www.sec.or.th/TH/Template3/Articles/2566/220866.pdf

https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

This article is a part of the class “751447 SEM IN CUR ECON PROB”

supervised by Asst. Prof. Napon Hongsakulvasu

Faculty of Economics, Chiang Mai University

This article was written by Naphat Phasang 641615029