CBAM for the EU: A Policy Proposal

Abstract

An important element of the comprehensive suite of climate and environmental policies advanced under the “European Green Deal” (EGD) is the “Carbon Border Adjustment Mechanism” (CBAM). CBAM is a policy safeguard against emissions leakage, that is, the relocation of emitting activities from the European Union (EU) to third countries due to the impact of EU climate policy ambition on production and investment decisions. A legislative proposal setting out the parameters of the CBAM is expected from the European Commission by the end of June 2021 as part of the “Fit for 55” package of initiatives operationalizing the strengthened climate target under the EGD. As of now, the design parameters of a future EU CBAM are still uncertain. What the process so far – including a formal consultation process carried out by the European Commission – has unmistakably shown, however, are considerable divergences in the views of key EU stakeholders about the preferred CBAM design, and, in some cases, what they consider to be red lines. This report proposes a CBAM design that seeks to balance trade-offs so as to secure its environmental and competitiveness benefits while maximizing its administrative, legal and technical viability, as well as political acceptability. An elegant technical proposal that ignores political feasibility is not one that should be taken seriously. Beyond the mere design, this proposal also addresses important procedural aspects and the timeline of implementation, which are critical for legal and political acceptability.