Carbon leakage refers to the process of shifted production and/or emissions to other jurisdictions with less stringent emission constraints. It is one of the key obstacles for the EU to reach its climate commitments. The CBAM was designed to specifically address this risk. Carbon leakage can occur when a domestic carbon price negatively impacts the competitiveness of an entity operating in this domestic context. This increased cost might result in the entity shifting its production to another country with a lower carbon price to reduce production costs. For example, a steel producer might consider relocating its production outside of the EU to avoid paying for the carbon it emits. Another possible instance of carbon leakage occurs when non-domestic producers that are not subject to the price of carbon enjoy significant competitive advantages compared to domestic producers, resulting in a shift of production abroad.

The sectors that will first be covered by the CBAM are energy-intensive industries, namely cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. When fully phased in, the CBAM will capture approximately 50% of the emissions covered by the EU Emission Trading System (ETS).

The CBAM is based on the purchase of certificates by importers, which represent the embedded emissions in the imported goods. The price of the certificates will be calculated based on the weekly average auction price of EU-ETS allowances, equivalent to euros per tonne of CO₂ emitted.

The CBAM will, in principle, apply to the imports of goods from all non-EU countries. However, countries participating in the EU ETS and Switzerland are excluded from the mechanism.

Even though carbon removal has not been explicitly taken into account by the CBAM yet, the system provides opportunities to create incentives for CDR. There could be several ways to include CDR in the context of CBAM particularly through criteria on the geological storage of greenhouse gases (GHG). Thus, some forms of CDR could be used to reduce embedded emissions, or to compensate for embedded emissions.

Assuming the EU-ETS includes permanent CDR within its scope to enable participants to reduce net emissions by 2030 at the earliest following the planned ETS Directive revision in 2026, a case can be made to integrate removals in the CBAM to make the two mechanisms work under the same rules. This would require clear rules on monitoring, regulatory and verificatory (MRV) mechanisms, with removals limited to hard-to-abate sectors.

CDR could be included either directly or indirectly within the CBAM

1. By authorising importers to buy durable removals to compensate a share of the embedded emissions and reduce their CBAM obligations. This addition could be done in accordance with the CRCF by clearly specifying that only permanent removals are allowed.
2. By recognising CDR as a way to reduce a product’s overall embedded emissions, therefore reducing the product’s net-direct emissions. For example, a steel-making factory in a non-European country could buy durable CDR credits in its country of operations to reduce the product’s emissions.

The revenues generated by the CBAM will go to the general EU budget. Since the CBAM covers many hard-to-abate sectors that will likely continue generating GHG emissions in the long term, it could be argued that some of the revenues generated by the CBAM could be used to incentivise/support CDR development/deployment. A share of the revenues could be used to finance the Innovation Fund.

Potentially including CDR within the CBAM does come with some risks, among them the risk of greenwashing and disincentivising decarbonisation along value chains. While the CBAM itself might not contain the tools needed to tackle these two risks, other EU legislations could help address these risks. Indeed, the CBAM is aimed to reflect the EU-ETS and equalise the playing field between domestic EU producers and non-EU producers in terms of the climate mitigation obligations they face. CBAM cannot, therefore, be more ambitious and stringent than the EU-ETS. Consequently, guardrails to ensure the effective and rigorous implementation of CDR should first take place domestically.

Only high-quality removals should qualify, and priority should be given to reducing embedded emissions while durable CDR should be aimed at compensating for hard-to-abate emissions where the emissions and carbon sinks correspond in terms of their warming impact and timescale (the like-for-like principle).

Omnibus revision

The proposed measures aim to develop a more efficient CBAM while maintaining the key design principles of the mechanism. Reporting requirements that rely on complex calculations and data collection processes have been simplified and streamlined. A minimum threshold of 50 tonnes for imported CBAM goods has been introduced, which keeps around 99% of emissions within scope while exempting around 90% of importers consisting mainly of small and medium-sized enterprises (SMEs).

Furthermore, indirect emissions have been excluded from the calculation of the embedded emissions for electricity imports. Authorised CBAM declarants will also have the possibility to claim a carbon price paid in a third country other than the country of origin, which may help bring together international CDR actors which would not otherwise have been able to cooperate.

CBAM in perspective 

The CBAM is not only considered an essential tool to achieve the EU’s climate objectives but also serves to ensure the EU’s industrial competitiveness with the rest of the world.

Other geographies are also engaging with similar ideas. The United Kingdom will introduce a CBAM by 2027. Interestingly, one of the questions asked pertains to whether carbon credits should be used to offset emissions. California has already put in place a system similar to the CBAM regarding electricity imports in some situations, and Canada is considering adopting a border carbon adjustment mechanism.

In contrast, many developing countries, particularly led by members of BRICS, have criticised the CBAM for targeting products constituting their main exports to the EU, negatively affecting their economic development, and contradicting the principles of the World Trade Organization (e.g. Ramos, 2023 or Fox, 2023).