Climate change is global and requires global action, a deeply challenging reality considering how complex global politics are on a good day. Thus far, smaller scale actions have proved more consistent and effective, with local, regional, national, and limited multinational activities producing stronger and more long-lasting plans to bring down greenhouse gas emissions and prepare for the effects of climate change. However, the interest in global decision making still exists, in part because of the limits of the existing, smaller scale activity; in particular, carbon leakage.
When Country A puts a tax on carbon to try and reduce its emissions, then a manufacturer can move to Country B to avoid that tax. This is a tale as old as fiscal policy, but greenhouse gas emissions add additional layers of complication. Climate change does not acknowledge borders. The failure of that manufacturer to reduce emissions when in Country B will still impact Country A just as much as if the GHGs came from within its own borders. This kind of cross-border impact has happened before with waterways, acid rain, and other issues, but climate change brings it to the next level. This ‘carbon leakage’ is a fundamental threat to the effectiveness of domestic carbon policy, and raises questions about which country is responsible for reducing which amount of carbon. Is Country B responsible for the emissions from manufacturing a product for the Country A market?
Enter the Carbon Border Adjustment Mechanism. This is an attempt to stop carbon leakage and reduce the burden on domestic manufacturers. Essentially, a country with a domestic tax on carbon will put the equivalent cost burden on the carbon impact of the imported products, generally with a limited focus on carbon-intensive sectors such as fertilizer and steel. The EU has been phasing in a C-BAM since 2023, with full effect taking place in 2026, and the UK is planning something similar. There is a carbon border adjustment for electricity going into California, and many countries with domestic carbon policies are watching the EU to see if they are able to use border adjustment mechanisms to their own industries’ advantage. There have been discussions of a C-BAM for the United States, but nothing has made it out of Congress. The EU’s full implementation of its C-BAM will involve a reporting and certificate system, where companies buy certificates to cover the carbon of their products.
There is a significant amount of debate around carbon border adjustment mechanisms. The first is a concern that this is protectionism and against the rules of the World Trade Organization. Proponents argue that a C-BAM is not a tariff (though you will hear it described as such) and thus within the bounds of the rules of the WTO. As the adjustment mechanism is equalizing the impact of carbon policy on imported and domestic goods, it is not actually favoring one or the other. In the EU’s C-BAM, companies that have paid carbon taxes in their home countries are able to deduct that amount from the border adjustment mechanism. If a country has superior emissions regulation relative to the EU, then the company may actually benefit as it will pay less than domestic and other international competitors. Another concern is the impact of border adjustment mechanisms on developing countries. Reflecting a constant debate in global sustainability discussions, the lack of resources that some countries have to transition to clean energy creates the appearance of having to choose between improving living conditions and developing the economy or having low carbon emissions and avoiding such financial burdens as the C-BAM. As many countries in the EU built their wealth prior to such policies, it is considered unfair to ask developing countries to put their own goals on hold due to the consequences of other countries industrializing and emitting GHGs first. Of course, climate change makes no such distinguishments and emissions from any country will make it worse, even if that country has only started significantly emitting greenhouse gases in recent years relative to fully developed nations. Some C-BAM policies attempt to address this issue, but it is such a fundamental tension in sustainability, it is unlikely to be solved perfectly by anyone. Lastly, any time there is a potential increase in price for things like concrete raises concerns about rising prices for end consumers, particularly in the case of building materials. Ideally, the impact will be limited by supporting domestic manufacturers and focusing on circularity of materials, but as these policies are still quite new, not all of the nuances can be predicted. It all comes back to the basic issue of climate change being incredibly urgent and unmanageable through a single nation’s actions. There are going to be tradeoffs, and people will not always agree on what those tradeoffs should be.
Though the EU has the biggest C-BAM policy and it is limited to carbon-intensive sectors, it is still prudent for those not directly affected to prepare for what this could mean, particularly if more countries adopt this model and more sectors are covered and as supply chains respond to these changes. Firstly, make sure you know your carbon footprint and the impact of each of your products. This includes knowing the origin and impact of the raw materials you use. The EU’s C-BAM model requires covered companies to report their carbon amounts and purchase certificates to cover that carbon, so if a business does not know its impact, it will be left scrambling. Once you have a grasp on the data, it is time to decarbonize. This could be a years-long process, so the sooner you start that clock, the better.
The world is watching to see if C-BAM will effectively address climate change. The biggest question is if C-BAM will actually reduce emissions. The models provided by economists have shown improvements, but reality is always messier than a model. Climate change is here, so serious policies, even when they require some trial and error, are essential for addressing this existential threat.
Here are some additional links to read up on C-BAM:
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#why-cbam
https://justenergy.com/blog/carbon-related-tariffs-and-energy-policy
https://www.cbc.ca/news/science/carbon-border-adustments-carbon-tariffs-explainer-1.7412677
https://www.sciencedirect.com/science/article/abs/pii/S0022199617301186
https://procurementmag.com/articles/what-is-the-eu-carbon-emissions-tariff
https://www.eenews.net/articles/carbon-tariffs-are-coming-heres-how-the-u-s-is-preparing