CBAM Mechanism

The EU prices carbon at 50-100 euros per ton for domestic manufacturers. Chinese steelmakers pay nothing. Without a border adjustment, EU steel mills lose on price and the emissions just move overseas.

A Carbon Border Adjustment Mechanism (CBAM) is a tariff on imported goods calculated based on the carbon emitted during their production, designed to equalize the carbon cost between domestic producers (who pay a carbon price) and foreign producers (who may not). The EU's CBAM, phasing in from 2023-2026, covers cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen.

The mechanism works by requiring importers to purchase CBAM certificates equal to the carbon price the goods would have faced under the EU ETS if produced domestically. If the exporting country already has its own carbon price, importers can deduct that amount, preventing double taxation.

Tracing a steel import. A Turkish steelmaker exports 1,000 tons of steel to the EU. Production emitted 1.8 tons of CO2 per ton of steel. The EU ETS price is 80 euros/ton.

How much does the importer pay in CBAM certificates?

144,000 euros. 1,000 tons x 1.8 tCO2/ton x 80 euros/tCO2. If Turkey had a domestic carbon price of 20 euros/ton, the importer deducts that: net cost drops to 108,000 euros. The CBAM equalizes the competitive playing field without requiring Turkey to adopt EU-level carbon pricing.

CBAM is the EU's answer to carbon leakage (emissions shifting to unregulated jurisdictions). It is also, critics note, a trade barrier by another name, and its WTO compatibility remains untested.

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