The European Union's Carbon Border Adjustment Mechanism (CBAM), a carbon levy on certain goods entering the EU, is designed to advance the cause of climate adaptation both within the bloc and around the world. CBAM could be an effective tool in pushing the global economy to become greener, but in its current form risks harming the economies of developing countries and hampering climate adaptation globally. CBAM could be a great step forward, but it must not leave developing countries behind.
CBAM was designed to counter carbon leakage, a phenomenon that refers to EU companies moving production outside of the EU or importing products from countries without carbon taxes in order to get around the EU's Emissions Trading System (EU ETS). As far as the EU is concerned, carbon leakage undermines the bloc's green policies and opens up EU companies who follow the rules to unfair competition. CBAM will therefore levy a tax that is equal to the price of carbon under the EU ETS on imports, with the caveat that non-EU producers can deduct this tariff if they are subject to a carbon tax in their own country.
Beyond carbon leakage, another touted benefit of CBAM is its potential to promote global industrial decarbonisation by nudging other countries into setting their own carbon price. In this sense, it marks a step towards addressing an internationally disorganised carbon taxation system by applying a uniform carbon price to domestic and imported products alike in the EU.
CBAM might participate in the so-called 'Brussels Effect,' whereby EU regulation creates a 'race to the top' for global regulation. Such an effect was first observed in 2012 by Columbia Law Professor Ana Bradford when she described how the EU, through a combination of market size, stringent standards and regulatory capacity, can elevate standards throughout the world. The Brussels Effect was first conceived of as de facto influence, whereby companies that operate both inside and outside the EU found it was not logistically practical to maintain lower standards outside the EU, thus allowing EU regulation to govern their global operations. CBAM might similarly influence global trade, by dealing with direct regulation of foreign producers.
Another benefit that EU policymakers rarely state explicitly is that the tax will generate revenue for the bloc, which has been trying to make itself less dependent on contributions from member states. The European Commission estimates that annual revenues from the tax will reach €9.1 billion by 2030, which it plans to use to reimburse the borrowing under NextGenerationEU, the EU's 2020 Covid recovery package.
[Continued, full piece on Land & Climate Review.]