The EU Agreement on a Carbon Border Adjustment Mechanism

June 7, 2023
3 min read
Louise Horrocks

As relevant Australian corporations prepare to meet the requirements of the Safeguard Mechanism, some corporations will also be preparing to meet international carbon pricing standards for carbon-intensive exports such as the EU’s Carbon Border Adjustment Mechanism (CBAM).

What is the CBAM?

The EU has been developing a carbon border adjustment mechanism (CBAM) to address 'carbon leakage', which occurs when EU companies shift their carbon-intensive production to countries with less strict climate policies. On 10 May 2023, the legislators signed off on the CBAM Regulation which will start to take effect in its transitional phase on 1 October 2023.

Evening out the price of carbon

The CBAM aims to put a price on carbon emissions from the production of carbon-intensive goods entering the EU. This encourages lower-emission industrial production in non-EU countries. By ensuring that a price is paid for the carbon emissions associated with certain imported goods, the CBAM ensures that the carbon price of imports is on par with the carbon price of domestically produced goods. This helps prevent the undermining of the EU’s climate objectives.

Carbon mechanisms around the globe

The EU is not the only jurisdiction to take this step with each of the following jurisdictions similarly responding:

  1. China launched their Emissions Trading System (ETS) in 2021 and is currently working with neighbours to develop a regional carbon market. The introduction of the CBAM is likely to incentivise countries at early stages of development to step up their carbon pricing systems and contribute to a more consistent global system.
  2. Japan’s Cabinet approved the Basic Plan for the “GX: Green Transformation Policy” in February 2023 which outlines Japan’s intention to encourage the development of low carbon technologies in partner countries and to facilitate global actions for the reduction of GHG emissions. Japan is confident that they are placed to avoid major impacts of the CBAM due to their decarbonisation efforts.
  3. South Korea’s ETS has been in place since the launch of the K-ETS in 2015 however, significant steel and aluminium exports to the EU are expected to feel the impacts of the CBAM.
  4. Members of US Congress have put forward proposals to create a CBAM for the United States. The introduction of the EU CBAM has encouraged the discussion of a US mechanism as the carbon-intensive sectors in the US will be required to pay a carbon tax under the mechanism beginning in 2026.

The butterfly effect of the CBAM and worldwide mechanisms

The EU regime as well as those introduced by our major trading partners will affect Australian corporations supplying products to the EU whether directly or indirectly via trading partners who supply to Europe, due to compliance costs being passed on. Australian corporates trading internationally should be considering the introduction of internal carbon pricing to factor these developments as well as undertake full supply chain analysis to properly understand both their risks and opportunities out of these changes.

If you wish to speak to our team about how these changes could affect your business, please contact Louise Horrocks.