CBAM: Bending the carbon curve or breaking international trade?

The Carbon Border Adjustment Mechanism (CBAM) is the world’s most significant carbon levy. It aims to support Europe’s industry in reducing its emissions without being outcompeted by producers in countries which have less ambitious climate policies. It is, in effect, a tax on carbon-intensive goods from outside the EU and is intended to encourage greener industrial production around the world.

In this European Policy Analysis, Alexandra Buylova and Naghmeh Nasiritousi (both at the Swedish Institute of International Affairs) discuss whether it is likely to stimulate this form of productive climate competition, or whether instead it might cause regulatory retaliation and fragmentation in global trade.

For not all actors welcome its introduction: rather than levelling the playing field it is sometimes seen as trade protectionism masquerading as noble environmental policy. Whether it is WTO-compatible has widely been asked, and will be tested.

Based on recent trends in trade and climate action, and on early responses, the authors make some recommendations as to how the EU can maximize the chances of CBAM success. These include keeping a strong focus on climate (not overloading the mechanism with other policy objectives); keeping the perspective of climate-exposed countries in focus (and not only the responses of big industrial producers), and making further efforts to reform trade rules so that global trade and climate goals are better aligned.