Comment by Dr. Danial Sturge, Carbon Policy Practice Manager at Energy Systems Catapult. 

Carbon Border Adjustment Mechanisms (CBAM) are in vogue. A CBAM can be used by a country or trading bloc to address asymmetric carbon policies between jurisdictions as a way of mitigating carbon leakage[1].

Last week, co-legislators in the European Union signed the CBAM Regulation, officially entering into force on 17^th May 2023. The EU’s CBAM itself will enter a transitional phase later this year in October. Simultaneously, the UK Government is consulting on policy measures to address the carbon leakage risk, including a potential CBAM.

But how did we get here?

The merits of a CBAM have been debated in literature for years, with the only example actively in place to date being in California. The California Emissions Trading Scheme uses what they call a “Border Carbon Adjustment” (BCA) for electricity imports from other states, whereby importers must pay an equivalent carbon price to cover embodied emissions.

The EU’s CBAM goes further than California’s BCA in two important ways:

1. It applies to a range of carbon-intensive, trade-exposed sectors: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
2. It applies across international borders.

This is a big step forward for carbon policy for two reasons:

1. Technically – implementing a CBAM is incredibly challenging. Calculating the CBAM liability requires accounting for the embodied emissions on imported goods and the carbon price already incurred in each of the jurisdictions that said goods have passed through.
2. Legally – it is an untested area of trade policy. For example, the EU claims that their CBAM complies with World Trade Organisation (WTO) rules, but China recently asked the EU to justify its incoming CBAM at the WTO and India plans to file a complaint to the WTO.

The rest of the world is watching – and in some cases reacting – to how the EU’s CBAM evolves. The UK, in addition to a potential CBAM, is exploring alternative measures, including mandatory product standards. We at Energy Systems Catapult have been long proponents of standards, including for their use in mitigating carbon leakage. In a blog post I wrote last year, I compared standards with a CBAM.

Since then the debate has continued to evolve. There is a recognition that policy measures to address carbon leakage cannot be developed in isolation – the future role of the UK ETS, and crucially free allowances, is even more important. Demand side measures, such as public procurement and labelling, have a potentially significant role to play. And getting carbon accounting right and the digital systems in place are fundamental to the success of which ever measures are eventually implemented.

Next month, we will be publishing a report, which will act as our response to the Government consultation, that goes into these key areas in more detail.

[1] Carbon leakage can occur if the competitiveness impacts that arise from carbon policies leads to emissions reduction from domestic organisations combined with increases in emissions in other jurisdictions, where carbon policy is either less ambitious or does not exist. This can lead to a net increase in global emissions.