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This week, we’re diving into one of the most talked-about upcoming policies in the European Union—the Carbon Border Adjustment Mechanism (CBAM). With growing interest from global industries and governments alike, CBAM is meant to reshape the way businesses approach carbon emissions and international trade. In this blog post, we’ll explore the origins of CBAM, how it works, and its far-reaching impacts on businesses both within and outside the EU. We’ll also examine the debates surrounding this pioneering policy and why it’s seen as a crucial tool in the fight against climate change.
CBAM was designed to align imported goods with the carbon pricing applied to domestic EU products under the EU Emissions Trading System (ETS). The mechanism initially covers carbon-intensive sectors such as steel, aluminum, cement, fertilisers, and electricity, with plans to extend it to other industries over time. By requiring importers to purchase carbon certificates reflecting the emissions embedded in these goods, CBAM aims to reduce the incentives for companies to move production outside the EU to avoid strict climate regulations.
The implementation of CBAM was decided upon by the EU in a voting process in April 2023. It was introduced as a mechanism to protect EU industries from being undercut by cheaper imports from countries with less stringent carbon regulations. With the establishment of the EU’s *Emissions Trading System (ETS) in 2005, European companies faced increasing costs for their carbon emissions. CBAM ensures that imported goods carry the same carbon costs as those produced within the EU, preventing foreign competitors from gaining an unfair price advantage. As part of the EU’s Green Deal and its ambition to achieve net-zero emissions by 2050, CBAM aims to safeguard EU industries while encouraging the global adoption of carbon pricing to support environmental goals.
1. Preventing Carbon Leakage: One of the main arguments in favor of CBAM is its potential to prevent carbon leakage, where companies move production to countries with lower carbon regulations to avoid stricter EU emissions policies. By applying a carbon price to imported goods, CBAM ensures that foreign producers are held to the same emissions standards as EU producers, balancing the playing field and incentivising global decarbonisation efforts.
2. Driving Global Climate Action: CBAM is seen as a tool to push global climate leadership, encouraging non-EU countries to adopt their own carbon pricing mechanisms or strengthen their existing climate policies. The mechanism creates an economic incentive for countries and industries worldwide to reduce their carbon footprints to maintain access to the lucrative EU market.
3. Supporting the EU’s Green Deal: CBAM is integral to the EU’s Green Deal, which aims to achieve net-zero emissions by 2050. Supporters argue that the policy is necessary to meet the EU’s ambitious climate goals and avoid undercutting domestic industries that are already investing heavily in emissions reductions.
4. Fair Competition and Sustainable Trade: Proponents also emphasise that CBAM promotes fair competition, ensuring that companies adhering to strict environmental standards are not disadvantaged by cheaper imports from countries with lax regulations. The mechanism encourages cleaner industrial production globally and fosters more sustainable trade practices.
While the CBAM intends to control and limit carbon emissions and promote environmental responsibility, it has faced significant opposition from multiple stakeholders. Nations such as China, India and South Africa argue that CBAM could act as a trade barrier, disproportionately affecting their exports to the EU. These countries claim the policy unfairly targets economies reliant on carbon-intensive industries, limiting market access and hampering economic development. China in particular, has voiced concerns over CBAM’s legality under World Trade Organization (WTO) rules, citing potential discrimination against non-EU goods.
Certain studies predict that certain African countries may face losses of up to $25 billion annually due to CBAM, as they struggle to meet the EU’s carbon requirements. Furthermore, some developing countries often lack the infrastructure and capacity to measure and verify the carbon content of their exports, which adds to the compliance challenges. This could lead to higher costs and reduced competitiveness in key industries like manufacturing, agriculture, and energy.
At Scature, we are committed to helping businesses transition to sustainable practices by focusing on regenerative, nature-based solutions. Regenerating industries such as agriculture directly aligns with CBAM’s end goals. By connecting companies with local, small-scale farmers who achieve nature-based carbon removal certification, we facilitate impactful climate action. These farmers utilize regenerative methods to produce raw materials that not only sequester carbon in the soil but also help reduce Scope 3 emissions - the indirect emissions along a company’s value chain. Through investments in carbon credits from these projects, businesses can address their Scope 1 and 2 emissions while simultaneously tackling Scope 3 emissions, all within their existing carbon budget.