CBAM Border Pricing Mechanisms in Detail

The Carbon Border Adjustment Mechanism (CBAM) is an EU policy tool designed to address carbon leakage by applying a carbon price on imports of certain goods from countries with less stringent climate regulations. CBAM border pricing mechanisms work by calculating the embedded carbon emissions in imported products and imposing a charge equivalent to the EU’s carbon price under the Emissions Trading System (ETS). This ensures that imported goods face similar carbon costs as those produced within the EU, thereby leveling the playing field and incentivizing cleaner production globally. The process involves importers reporting the carbon content of goods, which is then verified and priced according to the current ETS allowance prices. If the exporting country already applies a carbon price, the CBAM charge is adjusted to avoid double pricing. This mechanism primarily targets sectors at high risk of carbon leakage, such as cement, steel, aluminum, fertilizers, and electricity generation. CBAM aims to encourage foreign producers to reduce emissions, support the EU’s climate goals, and protect European industries from unfair competition. By integrating border pricing into climate policy, CBAM represents a significant step toward global carbon pricing harmonization and carbon market expansion.