The European Union's implementation of a Carbon Border Adjustment Mechanism (CBAM) to reduce the risk of carbon leakage as it strengthens its Emission Trading System is likely to push consumer prices higher and affect metal trade flows. It will also force producers globally to accelerate efforts to cut their carbon footprint.
What is CBAM?
The CBAM is set to complement the EU’s Emission Trading System (ETS), in order to help hit the bloc’s 'Fit for 55' target of reducing carbon emissions by 55% by 2030 compared to 1990 levels and eventually achieving net zero by 2050.
The ETS has been in place since 2005 and works on a cap-and-trade principle. A cap is placed on the amount of emissions that can be emitted by operators who fall under the ETS, and this cap is reduced over time. These operators either buy or receive allowances and can trade the allowances with each other. The price of carbon allowances on the ETS has seen significant strength in recent years following regulatory changes to the system (the market was trading sub-€10/t in early 2018 but has traded as high as €100/t in 2023). The EU ETS covers 40% of the bloc’s emissions.
Under the latest CBAM agreement – the first of its kind globally – goods imported into the EU will also face a levy at the border based on their emissions footprint. This will be phased in from 2026 until 2034.
While it may appear that CBAM is aimed at driving decarbonisation among key trade partners, it is in fact a tool to make the EU's ETS more robust and effective.
The European Commission currently provides free allowances under the ETS to industries where there is a high risk of carbon leakage. Carbon leakage is where carbon-intensive production is moved to countries where there are less stringent climate policies in place, therefore resulting in no reduction in emissions. In fact, the risk is for higher emissions.
The Commission wants to start reducing the amount of free allowances given to these industries in order to push them to decarbonise. However, in order to mitigate the risk of carbon leakage when doing so, the EU will charge a carbon tax on imports based on their carbon footprint.
CBAM would initially apply to imports whose production is carbon intensive and at the most significant risk of carbon leakage, including cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. CBAM is mostly limited to basic materials and their key intermediates with the broadest value chain coverage in the steel sector, covering both raw materials and downstream fabricated products.
The European Commission estimates that CBAM will help reduce CO2 emissions in the sectors it covers by 1% in the EU and 0.4% in the rest of the world by 2030. It also predicts that the CBAM will decrease carbon leakage in the five sectors by 29% by 2030.
Products covered under CBAM for the steel and aluminium sectors
Read more about EU carbon tax on ING THINK.