The report recently submitted by Fundacion Naturgy ‘The EU carbon -border adjustment mechanism (CBAM)‘, prepared by Compass Lexecon, reviews the history and the principles that have led to the current mechanism and its authors pose the most important points when addressing the implementation phase (2026-2034) in a context in which the competitiveness of the European industry is considered a priority.
The border carbon adjustment mechanism (CBAM), adopted in 2023 by the European Union, provides an improved frame to address carbon escape due to the risk of the relocation of industrial activities to countries where a carbon price does not have to be paid.
To date, the risk of carbon leak has been mitigated by free emission rights and indirect compensation of the costs of greenhouse gases (GHG), so the CBAM was born to replace these two systems and at the same time encourage goods produced in other jurisdictions and destined to be imported to the EU.
The CBAM will force certain assets that are imported to Europe are subject to a border tax based on an estimate of its carbon content and the price of the carbon of the EU emission rights trade regime (RCDE), to match the conditions in terms of cost of emissions between internal production and imports, guaranteeing that the principle is implemented. Carbon and, therefore, encourage the decarbonization of producers from outside the EU who wish to sell in Europe.
On the other hand, the CBAM also seeks to contribute to a stable and safe policy framework for investments in low or null carbon technologies, while minimizing the risk of the measure.
For the authors of the report, economically, the principles behind the concept of the CBAM make a lot of sense, since they reflect the idea of “who pollutes pays”, but the implementation of the mechanism raises a series of complex problems and challenges.
For Compass Lexecon analysts, the success of the mechanism will depend on some implementation standards that are yet to be defined, among which, carbon costs that affect exports, the reorganization of commercial flows and compensation for the cost of indirect emissions are still
Carbon costs that affect exports
The CBAM is designed to address the risks of carbon escape related to domestic consumption and imports, but does not provide a mechanism to compensate for differences in export production costs.
The goods produced in Europe, exposed to the costs of the EU RCDE and destined for global exports, can pay a higher carbon price than its foreign competitors. This creates a risk of carbon escape, since the decrease in export competitiveness threatens the economic viability of local production for industrial sectors where exports represent an essential market, for example, to achieve an economy of scale.
The reorganization of commercial flows
The analysts consider that the introduction of the CBAM can lead to a reorganization of commercial flows with foreign commercial partners that would prevent the mechanism from being effective in preventing carbon escape. For example, products with less carbon emission from a country could be redirected towards fate with the highest carbon costs, that is, the EU. This would undermine the efficiency of the CBAM system, since new emission reduction activities would not be carried out, given that products with greater carbon intensity would simply redirect towards countries not belonging to the EU.
In addition, the European producers of complex goods that are not covered by the mechanism, -but that they depend totally or partially on materials covered by the CBAM -, they would have to assume higher components due to the RCDE applied internally and the charges of the CBAM on the border, compared to their foreign competitors. Therefore, EU companies could be encouraged to directly import complex goods, instead of importing components subject to CBAM and subsequently manufacturing such goods in the EU.
Compensation compensation of indirect emissions
In accordance with the report, the rules planned to calculate indirect emissions associated with the electricity used in the manufacture of goods covered by the CBAM generate a risk of unequal competence between European and foreigner goods. The calculation of indirect emissions implicit in foreign merchandise could use an average gei content in the electricity of each country. However, the GHG content reflected in electricity prices in Europe is the result of the production of a marginal unit. As a consequence, foreign products could be favored compared to European products, since GHG’s average content is usually less than the derivative of the production of a marginal unit.
Finally, the analysis concludes that the considerable degree of uncertainty that persists on the details of the CBAM standards could, by itself, deter investment and contribute to the problem of carbon escape. The document includes doubts regarding the compatibility of the CBAM with the norms of the World Trade Organization (WTO), depending on some specific application standards. The application of the CBAM also focuses on some well -known problems related to climatic policies and development.