Impact of the Carbon Border Adjustment Mechanism

Abstract

As part of the EU Green Deal, the European Commission (EC) has announced a new renewable energy policy instrument that is to be installed in addition to the Emission Trading Scheme (ETS) of the EU: the Carbon Border Adjustment Mechanism (CBAM). CBAM obligates companies, from non-EU countries who want to import products from the selected CBAM sectors – Iron & Steel, Aluminium, Cement, Fertilizers and Electricity – into the EU, to pay a certain tariff for the carbon content of that product. Initially, CBAM covers only imports and the carbon emitted during the actual production of the products. CBAM has four objectives: (i) preventing carbon leakage; (ii) protecting EU industries against reduced competitiveness; (iii) incentivising non-EU trade partners to adopt measures comparable to the EU’s; and (iv) yielding revenue to reuse in accelerating decarbonisation of the energy system.
Using interviews and a literature study, a case study was conducted on the dynamics of the trade flows of aluminium between Germany and China. Given these dynamics, six themes were studied to assess the consequences of CBAM: (i) compatibility of the policy instrument; (ii) administrative work needed; (iii) stimulation of decarbonisation in non-EU countries; (iv) competitive position of the German aluminium sector; (v) economic and geopolitical winners and losers; (vi) the three major risks of CBAM. This led to four factors that help in assessing the influence of CBAM and making CBAM more effective in achieving its objectives. These factors are tailor-made, manageability, export dependency and geographical closeness. Assessing the impact of CBAM on a specific sector from an economic and geopolitical perspective proved to be a highly complex process, where each factor is surrounded by a lot of uncertainty. The four factors can be used in further research on CBAM, as well as its future implementation.