The Rise of Carbon Border Adjustment Mechanisms (CBAMs) Beyond Europe

Admin
2025-03-21

The European Union’s Carbon Border Adjustment Mechanism (CBAM), officially implemented in October 2023, has become a blueprint for how governments globally are addressing carbon leakage and ensuring that international trade aligns with climate goals.

The Rise of Carbon Border Adjustment Mechanisms (CBAMs) Beyond Europe The European Union’s Carbon Border Adjustment Mechanism (CBAM), officially implemented in October 2023, has become a blueprint for how governments globally are addressing carbon leakage and ensuring that international trade aligns with climate goals. The mechanism imposes a carbon price on imports of certain goods from countries with less stringent climate policies, effectively leveling the playing field for domestic industries subjected to the EU’s Emissions Trading System (ETS).

But Europe isn’t alone in leveraging this innovative policy tool. Countries like Canada, the United Kingdom, Australia, and even the United States are actively exploring or implementing their own versions of CBAMs. This global trend is not only reshaping trade dynamics but also compelling companies worldwide to reassess their supply chain emissions, decarbonization strategies, and financial planning.

For sustainability practitioners, corporate finance teams, and supply chain managers, understanding and navigating these mechanisms is essential to maintaining market access and minimizing costs.

What is a Carbon Border Adjustment Mechanism (CBAM)? CBAMs are designed to prevent carbon leakage, a situation where companies relocate production to countries with laxer climate regulations to avoid carbon pricing, undermining global climate efforts. By applying a carbon cost on imports of goods such as steel, aluminum, cement, fertilizers, electricity, and hydrogen, CBAMs incentivize global industries to decarbonize.

The EU’s CBAM is currently in its transitional phase (2023-2025), requiring importers to report emissions embedded in their goods. From 2026 onwards, importers will have to purchase CBAM certificates reflecting the carbon price that would have been paid if the goods had been produced under the EU’s ETS.

Why Are CBAMs Gaining Traction Globally?

1. Leveling the Playing Field for Domestic Industries

-Countries with strict carbon pricing mechanisms (like the EU ETS or Canada’s carbon tax) risk undermining their industries’ competitiveness against foreign producers without similar costs. CBAMs ensure that all products, domestic or imported, bear equivalent carbon costs.

2. Accelerating Global Decarbonization

-CBAMs act as a trade lever to push non-compliant countries to adopt more ambitious climate policies, effectively spreading the influence of strong climate regulations beyond national borders.

3. Revenue Generation for Green Investments

-The revenues from CBAM certificates can be funneled into green innovation and climate resilience projects, further supporting a country’s sustainability agenda.

Countries Implementing or Exploring CBAMs

1. Canada: Carbon Pricing and Potential CBAM Integration

-Canada’s federal carbon pricing system has been in place since 2019, but concerns about competitiveness have led policymakers to consider a CBAM-like mechanism.

Discussions are ongoing to align with the EU’s CBAM to protect Canadian industries like steel and cement.

2. United Kingdom: Post-Brexit Climate Trade Strategy

-The UK’s Emissions Trading Scheme (UK ETS) mirrors the EU’s system, and a CBAM consultation was launched in March 2024. The UK government is assessing how a CBAM could protect domestic industries while maintaining strong climate commitments.

3. Australia: A New Direction on Climate Policy

-Historically resistant to carbon pricing, Australia is shifting gears with new climate leadership. The government is considering a CBAM approach as part of its broader strategy to meet net-zero targets by 2050.

4. United States: The FAIR Transition and Competition Act

-Introduced in Congress in 2023, the FAIR Transition and Competition Act proposes a CBAM that would impose carbon fees on imports of carbon-intensive goods. Although politically contentious, the proposal reflects growing bipartisan recognition of the need to integrate climate considerations into trade.

Implications for Businesses and Finance Professionals

1. Supply Chain Decarbonization is No Longer Optional

-Companies exporting to the EU or other CBAM-implementing countries must ensure their supply chains align with carbon reduction targets. This will require significant investment in cleaner technologies, energy-efficient processes, and renewable energy procurement.

2. Financial Implications: Carbon Costs as a New Operational Expense

-For financial professionals, CBAM-related costs will need to be factored into pricing models, profitability assessments, and financial risk analyses. Importers may face higher costs, which could impact margins and competitiveness.

3. Risk of Trade Disruptions and Legal Challenges

-CBAMs could trigger trade disputes under the World Trade Organization (WTO) rules, particularly from countries that view them as protectionist measures. Businesses should stay informed about potential legal challenges and evolving trade negotiations.

4. Opportunities for Green Innovation and Competitive Advantage

-Companies that proactively decarbonize can gain a first-mover advantage in global markets. Access to sustainable finance, green bonds, and carbon credit markets can further support these efforts.

Practical Steps for Compliance and Strategy

1. Conduct a Comprehensive Carbon Footprint Assessment

-Identify and quantify Scope 1, 2, and 3 emissions across the supply chain, focusing on products likely to be affected by CBAMs.

2. Engage with Suppliers to Improve Carbon Transparency

-Work with suppliers to ensure they adopt emissions reporting practices and implement energy efficiency measures.

3. Factor Carbon Costs into Financial Planning

-Integrate carbon pricing scenarios into financial models and budget forecasts to anticipate potential CBAM-related expenses.

4. Explore Carbon Offsetting and Reduction Strategies

-While CBAMs primarily target actual emissions reductions, companies can also invest in carbon offsets and renewable energy credits to complement decarbonization efforts.

5. Stay Informed on Policy Developments

-Regularly monitor international trade developments, WTO rulings, and bilateral trade agreements that may influence CBAM implementation globally.

Key Takeaways for Practitioners -Act Early: Delaying decarbonization could lead to significant cost increases as CBAMs expand globally.

-Integrate Carbon Costs into Financial Strategy: Treat carbon pricing as a core financial variable in strategic planning.

-Use CBAMs as a Competitive Lever: Companies that decarbonize early will have a pricing advantage in carbon-regulated markets.

-Monitor Global Trends: CBAMs are spreading beyond Europe, and staying informed will help businesses adapt proactively.