As part of its July 2021 package in support of a 55 percent reduction in greenhouse gas emissions by 2030, the European Commission proposed a Carbon Border Adjustment Mechanism (CBAM). The purpose of the mechanism is to prevent the risk of carbon leakage while free allowances to manufacturing industries are gradually phased out under the revised EU ETS.
The CBAM is controversial. It represents a massive shift in the system of carbon leakage protection. However, if designed correctly, and complemented with a robust package of supporting policies, CBAM could be a key enabler of the industrial transition to low-carbon technologies and a more circular economy.
However, for the CBAM to play this role, we need pragmatic solutions to key design issues. In particular, important issues regarding exporter protection, possibilities of carbon leakage related to resource shuffling, use of revenues, and the transition from free allowances to auctioning. This impulse paper analyses these issues and offers pragmatic and actionable suggestions on how to solve key implementation design questions. It also tries to map out possible interactions between “climate clubs” and CBAM.