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Carbon Border Adjustment Mechanism is envisaged under the European Green Deal to reduce the risk of carbon leakage

November 27, 2020

Carbon border adjustment mechanism (CBAM) is envisaged by the European Green Deal (EGD) as one of the key measures that should contribute to achieving EU’s long-term objective of climate neutrality by 2050 as well as EU’s climate ambition to reduce greenhouse gases emissions by 5055% from 1990 levels by 2030. In this context, the European Green Deal emphasizes that: Should differences in levels of ambition worldwide persist, as the EU increases its climate ambition, the Commission will propose a carbon border adjustment mechanismfor selected sectors, to reduce the risk of carbon leakage.” 


According to the European Commission, carbon leakage occurs when, for reasons of costs related to climate policies, businesses transfer their production from the EU to other countries with less stringent emission regulations in place, or when EU products are replaced by more carbon intensive imports. In such case global emissions will not be reduced.  

Carbon leakage is identified as environmental risk and also as risk for the competitiveness of EU’s businessesAs long as there is no international binding agreement with a global carbon price, there is a need to reduce the risk of carbon leakage.   

CBAM would ensure that the price of imports reflect more accurately their carbon content. The measure would need to be designed to comply with World Trade Organization rules and other international obligations of the EU. It would be an alternative to the measures that currently address the risk of carbon leakage in the EU’s Emissions Trading System (EU ETS). Nowadays, under the EU ETS, industries which are considered to be at significant risk of carbon leakage receive special treatment (such as free allocation of allowances or compensation for the increase in electricity costs) to support their competitiveness. 


The idea of CBAM has already been discussed several times in the EU. Calls for the introduction of CBAs originated in industrialized countries, primarily due to concerns about the lack of comparable climate commitments in developing countries and U.S. withdrawal from the Kyoto Protocol. More recently, CBAs have been discussed by both developed and developing countries. 

EGD’s action plan contains ambitious climate targets which should be reached during a very short period of time (such as 5055% carbon emissions reduction by 2030). With these ambitious targets the fear of carbon leakage is stronger because carbon prices in the EU might have to increase significantly in order to achieve these targets.  

The process has already started. The Commission has already published an inception impact assessment on the CBA and launched public consultations with stakeholders which started on July 22, 2020 and lasted until October 28, 2020. Introduction of CBAM proposal is scheduled by the European Commission for the second quarter of 2021. 


The overarching idea under the WTO agreements is that a country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals.  

The main components of this non-discrimination principle are:  

  • Most Favored Nation: Treat imports from all countries the same (Art. I GATT) 
  • National Treatment: Treat imports no worse than domestic products (Art. III GATT) 
  • Prohibition on import restrictions (Art. XI GATT) 

The most important GATT clause from environmental perspective is Article XX on General Exceptions. WTO members may adopt policy measures that are inconsistent with the above-mentioned principles, but necessary to protect human, animal or plant life or health, or relating to the conservation of exhaustible natural resources. 

It is generally considered that careful and detailed design choice is a key for creating CBAM that is consistent with WTO rules. The environmental purpose of the measure has to be clearly established through its design and practical implementation. It must not serve the protection of EU domestic industries from competition. 


Several possible options have however been stated in the Inception Impact Assessment regarding the type of policy mechanismThusCBAM might be established in the form of  

  1. a carbon tax on selected products  both on imported and domestic products,  
  2. a new carbon customs duty or tax on imports or  
  3. the extension of the EU ETS to imports.  

The CBAM should apply to selected industries at risk of carbon leakage. It is unclear so far which sectors would be subject to this new mechanism.  

Another big uncertainty is related to the methodology that is going to be used for calculating the greenhouse gas emissions associated with the production of an imported product. How will carbon content be calculated? Will CBA be based on direct emissions, emissions from electricity production, or emissions from the production of raw materials? What about transportation? Will the measure be industry-wide or company- or product-specific? All these questions are still to be answered. 


A carbon adjustment will make it more expensive to import carbon-intensive products, which at the same time can spur changes towards more sustainable products in the EU and in third countries. The impacts will of course vary depending on the design and in particular on the sectors covered by the adjustment mechanism. 

– Olga Gerasina, Environmental law specialist, Sweco 

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