The EU Carbon Border Adjustment Mechanism (CBAM) is a policy tool being considered by the European Union (EU) to address the issue of carbon leakage, which occurs when companies relocate production to countries with weaker climate regulations in order to avoid paying for carbon emissions. The CBAM aims to level the playing field by placing a carbon price on imports of goods and services into the EU, in order to incentivize companies to reduce their emissions and encourage the use of cleaner technologies.

The CBAM would work by setting a carbon price on imports into the EU based on the sector in which they are produced and the level of emissions associated with their production. This carbon price would be applied to all imports, regardless of the country of origin, and would be adjusted based on the carbon pricing policies in place in the country of origin. Importers would then be required to pay the carbon price on their imports, either directly or through the use of carbon credits.

The CBAM is intended to support the EU’s goal of achieving climate neutrality by 2050 and to encourage the development and use of low-carbon technologies. It is also intended to help ensure that EU businesses are not disadvantaged by the cost of carbon pricing, which would help to maintain their competitiveness.

There are, however, a number of challenges associated with implementing the CBAM, including potential trade conflicts with countries that do not have equivalent carbon pricing policies and the need to ensure that the carbon price applied to imports reflects the actual emissions associated with their production.

Overall, the EU Carbon Border Adjustment Mechanism is an important policy tool that has the potential to help address the issue of carbon leakage and to support the transition to a low-carbon economy.