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Carbon border levies

The level of climate ambition varies significantly across the globe. In areas of the world where companies must invest more in rapid decarbonisation, there exists a risk that they will face unfair competition from regions where industry is allowed to continue to pollute with impunity. There is also the risk that countries or blocs with more ambitious climate goals will undermine their targets by importing products with high carbon emissions embedded within them from countries with less strict regulations.

Carbon border levies or taxes, which impose a carbon price on imports from higher polluting countries, can help tackle these risks and protect decarbonising industries from unfair competition.

The European Union has become the first region in the world to put in place such a levy. Known as the Carbon Border Adjustment Mechanism, the CBAM, which will become operational in 2026, aims to tackle these risks as well as address concerns about so-called carbon leakage, the unproven contention that industries relocate when forced to pay for their emissions.

By phasing out free allocations under the European Union’s Emissions Trading System (EU ETS), the CBAM will eventually ensure that EU heavy industries will start paying a carbon price for their pollution, finally reinforcing the ‘polluter pays’ principle. However, at present, the phasing out of free allowances is too slow and must be accelerated. The fact that only direct emissions will initially be included is also another problem with the CBAM, as it should include indirect emissions from the start.

Another drawback of the CBAM in its current form is the unclarity in the use of the revenue it will generate. At present, CBAM revenue will be earmarked for the EU’s “own resources”, but no further indication is given to how this will be spent. To ensure compliance with international trade rules and a fair global transition, CBAM revenue should go in its entirety to supporting climate action in vulnerable countries.

If the CBAM is to become an effective climate tool, these shortcomings must urgently be addressed. 

What is CMW doing about it?

When it comes to the CBAM, Carbon Market Watch focuses on:

  • Observing policy developments and negotiations related to the CBAM 
  • Researching and presenting recommendations for making the CBAM more effective
  • Following the developments in third countries’ carbon markets and investigating their interaction with CBAM
  • Investigating and reporting on CBAM’s implementation 

The CBAM represents a significant step forward and as the mechanism becomes operational in the coming years, it will hopefully nudge the EU’s trading partners to implement their own carbon pricing systems, placing the economic burden of emissions on the shoulders of actual polluters. We call on the EU to ensure CBAM better reflects the principles of equity and just transition.

Lidia Tamellini

Expert on EU industrial decarbonisation

The CBAM represents a significant step forward and as the mechanism becomes operational in the coming years, it will hopefully nudge the EU’s trading partners to implement their own carbon pricing systems, placing the economic burden of emissions on the shoulders of actual polluters. We call on the EU to ensure CBAM better reflects the principles of equity and just transition.

Lidia Tamellini

Expert on EU industrial decarbonisation

What changes is CMW demanding?

Indirect emissions (scope 2) must be included in the CBAM from the start

Broaden CBAM’s scope to new products (such as bulk chemicals) already in 2026, with the end goal of covering all EU ETS sectors

Channel CBAM revenues to vulnerable countries to support their decarbonisation efforts

Ensure third countries set up their own fair and effective carbon pricing systems

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Highlighted

Revenue from the sale of CBAM certificates must be channelled directly to support climate mitigation and adaptation in fragile economies

Contact our experts

Sam Van den plas
Policy Director

sam.vandenplas[at]carbonmarketwatch.org

Lidia Tamellini
Expert on EU Industrial Decarbonisation

lidia.tamellini[at]carbonmarketwatch.org

Eleanor Scott
Expert on EU Carbon Markets

eleanor.scott[at]carbonmarketwatch.org

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