The following report, written in partnership with Sandbag, assesses the impacts and risks of the EU’s proposed carbon border adjustment mechanism (CBAM). The impact of the likely CBAM will be minor: the CBAM only covers 3.2 percent of goods imported into Europe, but 47 percent of the free emission allowances currently given to industry.

On 14 July 2021, the European Commission put forward its proposal for a carbon border adjustment mechanism (CBAM), a mechanism that would put a carbon levy on imports of certain emission-intensive products from third countries into the EU. This is part of the ‘Fit for 55’ package, a group of 12 directives and regulations aiming to achieve 55% emissions reductions compared to 1990 levels.

The introduction of a CBAM was first presented by the European Commission as “an alternative to the measures that address the risk of carbon leakage in the EU’s Emissions Trading System”.  

Different stakeholders, including policymakers in the European Commission and EU Member States, the European Parliament, industries, and EU’s trade partners, hold different positions on what the CBAM should try to achieve. These competing views will be brought to bear in the legislative process to come and will impact the final design of the CBAM, which is due to be fully implemented by 2026 following a three-year transition phase beginning in 2023.

The CBAM, if implemented in its current proposed form, will raise the cost for EU importers of some Chinese goods to access the European market. But the overall impact is likely to be small as the current proposal only covers a small share of Chinese exports to the EU, and importers will recover most of the additional costs through higher prices in EU markets.