December2024Learning from CBAM'stransitional phaseEarly impacts on trade and climateeffortsBy Elisabetta Cornago and Aslak Berg赛MAERSK赛MAERSK赛MAERSKQUESTEQUESTEALADIN★★★★★*CENTRE FOR EUROPEAN REFORM★★LONDON◆BRUSSELS★BERLIN★★★Learning from CBAM'stransitional phase:Early impacts on trade and climateeffortsBy Elisabetta Cornago and Aslak BergThe EU applies a carbon price to its heavy industry through its Emissions Trading System (EU ETS).To prevent carbon leakage-the flight of carbon-intensive industry away from the EU and towardscountries with looser environmental regulation-the EU so far has opted to largely exempt its heavyindustry from the ETS carbon price.The introduction of the Carbon Border Adjustment Mechanism(CBAM)changes the EU's strategy byapplying carbon pricing both to domestic production and to foreign producers who sell in the EU,which allows it to level the playing field.CBAM applies to importers of a subset of goods from outsidethe EU:iron and steel,cement,aluminium,fertilisers,electricity and hydrogen.CBAM has already been imposing carbon accounting and reporting duties on these goods sinceOctober 2023.These are administratively burdensome,but one year after their introduction,CBAMhas not had visible impacts on trade flows.Producers are absorbing these administrative costs,andthey continue to trade with the EU.At the same time,CBAM has already encouraged other countriesto implement their own carbon price systems or adjustment mechanisms.Starting in 2026,importers of CBAM goods will have to pay a carbon price aligned with the EU ETSone.This will push foreign producers to focus on limited exports of'cleaner,lower-carbon productstowards the EU,redirecting more carbon intensive ones elsewhere.Emissions would not decreaseimmediately and global markets of CBAM goods may split between low-carbon and high-carbongoods -at least until the former become more competitive globally.But in the longer term,there willbe more momentum to decarbonise production of CBAM goods,leading to cleaner exports towardsthe EU and generally lower industrial emissions.*CBAM is a climate policy tool with trade implications.This hybrid nature has irked many of the EU'strade partners:their main criticism is that CBAM is discriminatory,privileging countries that choosecarbon pricing over other decarbonisation policies.It also imposes a relatively heavier cost onproducers with more carbon-intensive processes,which tend to be in developing countries.Somecountries,including China and India,have threatened to file WTO complaints against CBAM,thoughthe EU remains adamant that the policy is WTO-compliant.The countries most affected by CBAM will be those countries that export a high volume of carbonintensive goods to the EU and do not apply a domestic carbon price.Many are large economies,mostly in the high-or middle-income category:China,Russia,Turkiye,the UK,the US.These countrieshave the means to adapt to CBAM-implementing or strengthening their own carbon pricing system(like China,Turkiye and the UK),subsidising industrial decarbonisation (like the US has been doingwith the Inflation Reduction Act)or merely absorbing the loss (in the case of Russia).December 2024