By Paul A. Davies, Michael D. Green, and James Bee

The CBAM would seek to mitigate carbon leakage through the imposition of a levy on carbon-intensive imports into the EU, while free allowances under EU ETS would be phased out.

On 13 December 2022, negotiators from the European Parliament and European Council reached a provisional and conditional agreement on the terms of the EU’s carbon border adjustment mechanism (CBAM).

The CBAM was initially proposed by the European Commission in July 2021 as part of its “Fit for 55” package of policies. The measure seeks to address and mitigate the risk of “carbon leakage” from the EU, which refers to the risk that the EU’s greenhouse gas reduction efforts will be offset by increasing emissions outside of its border through the relocation of production to non-EU countries with less ambitious emissions reduction policies.

The CBAM would impose a levy on in-scope goods that are imported into the EU. Importers of such goods would be required to pay an amount equal to the cost of the emissions allowances under the EU Emissions Trading System (ETS) that would have been necessary to pay to produce that good in the EU.