Getting the Transition to CBAM Right

The EU will need to start phasing in an alternative system to protect EU energy intensive industries before 2030, though not in all sectors. This new system must protect against leakage and also incentivise industry to start decarbonisation during the coming decade.

The proposed “climate club” may have value as a complement to a CBAM, but it is not a credible stand-alone option. Similarly, consumption charges also raise numerous practical and political difficulties that are difficult to resolve, discounting them as a viable alternative to a CBAM.

It would promote carbon cost pass-through along the value chain, incentivising recycling and the move to lower-carbon materials; it would allow the EU to raise vital funds to finance Carbon Contracts for Difference; and it would help to incentivise cooperative climate action on carbon leakage internationally.

We suggest a two-step approach to this question, including a slightly slower phase-in rate for auctioning prior to 2030, coupled with the prioritisation of decarbonisation support for abatement. This could be followed by a review of the risks to exporters in 2029 based on emerging international action. In a worst-case scenario, a freeze in the phase-down of free allocation to exported production could be considered once CBAM was well established as a policy and risks of retaliation have reduced.