An Overview of Carbon Border Adjustment Mechanism
Nilgün Aytekin // 08.04.2024
We are cognizant of the escalating threat posed by climate change on a global scale. The rise in greenhouse gas emissions necessitates effective measures by states to combat environmental issues such as global warming, extreme weather events, and loss of biodiversity. In this context, the Carbon Border Adjustment Mechanism (CBAM) emerges as an important solution.
Definition of Carbon Border Adjustment Mechanism
CBAM is a policy tool to apply a cost equivalent to the carbon costs incurred during the production of commercial goods within the borders of the European Union (EU) to goods imported to EU countries. The main goal is to control carbon emissions and ensure that products imported into the EU comply with the same environmental standards as those produced domestically.
The Carbon Border Adjustment Mechanism (CBAM) can be viewed as an extension of the Emission Trading System (ETS), marking a significant milestone in our approach to environmental sustainability. It is designed to progressively tighten the emission caps allocated to companies under the ETS framework, encouraging a shift towards eco-friendly energy sources and facilitating emission reductions without imposing undue economic burdens. While the ETS stands as a potent instrument in combating climate change, it does entail inherent risks that the CBAM seeks to address.
In nations where the Emission Trading System (ETS) is in force, businesses exceeding prescribed emission limits face either additional costs via allocations from other entities or direct taxation. Projections indicate that as these limits decrease significantly, there will be an increase in the carbon taxes that businesses must pay. This situation creates the possibility that producers seeking refuge in jurisdictions lacking rigid environmental mandates or where carbon emissions are not yet subject to economic valuation, a phenomenon termed ‘carbon leakage’. Such a risk could seriously undermine global climate efforts. This is where SKDM comes into play, where embodied emissions will be taxed to prevent carbon leakage.
How will the Carbon Border Adjustment Mechanism be implemented?
The CBAM Regulation is set to take its transitional period starting from October 1, 2023, and finishing at the end of 2025. CBAM is designed to be applicable to specific sectors including Iron-Steel, Cement, Fertilizers, Aluminum, Electricity and Hydrogen. For products included in these sectors, importers will initially be obliged to report the emissions found in their products in three-month periods. From January 1, 2026, onwards, CBAM goods importers must register with the national CBAM authority, with applications for CBAM registration accepted from January 1, 2025. Additionally, starting January 1, 2026, businesses are mandated to pay for the carbon emissions generated in the production of CBAM goods outside the EU, involving the purchase of carbon certificates from the national CBAM authority. Over an eight-year period, CBAM will also replace the free quotas granted under the EU Emissions Trading System (ETS). In this way, CBAM will be a significant incentive for EU manufacturers to reduce emissions.
The Carbon Border Adjustment Mechanism (CBAM) emerges as a pivotal instrument in combating climate change. Embraced by the global community to mitigate the impacts of global warming and uphold environmental sustainability, this mechanism bolsters endeavors to curtail carbon emissions. It stands as a significant stride toward attaining worldwide climate objectives. For the latest updates and information about CBAM, you can visit the following link: https://lnkd.in/dmjK583S
References:
European Commission – Border Carbon Adjustment Mechanism
European Commission, 2020: European Green Deal. Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions. COM(2019) 640 final.
AB Emisyon Ticaret Sistemi ve Sınırda Karbon Düzenleme Mekanizması, Sayı:AYM-5, GAİB Eğitim ve Ekonomik Araştırmalar Şubesi, Kasım 2022
