By Richie Lin.    Photo : Christian Lue

CBAM stands for Carbon Border Adjustment Mechanism. It is a carbon border tax that the European Union (EU) is planning to implement in 2026. The CBAM aims to reduce carbon emissions by imposing a tax on imported goods based on their carbon footprint. The tax will be levied on products that are produced in countries with less strict carbon regulations than the EU. The CBAM will initially target five high-carbon industries: cement, electricity, fertilizers, steel, and aluminum. The CBAM will require importers to purchase CBAM certificates to prove that the products they are importing meet the EU’s carbon standards. The price of the certificates will be based on the average weekly auction price of carbon quotas in the EU Emissions Trading System.

According to a report by Boston Consulting Group, the CBAM will have a profound impact on international trade and geopolitical dynamics pertaining to carbon emissions, especially if other major economies adopt similar systems. The report suggests that the CBAM will incentivize the decarbonization of global supply chains and ensure that the EU’s local producers aren’t undercut by imports from overseas companies who don’t face the same carbon costs.

The CBAM carbon tariff is levied to solve the problem of carbon leakage, encourage companies to actively reduce carbon emissions in products produced in non-EU areas, and prompt governments of non-EU countries to formulate relevant regulations and mechanisms to respond. In the future, this will increase the operating costs of companies and require the most practical and effective approach is to adjust operating strategies and invest more efforts in reducing the carbon emission of products. The CBAM will require importers to purchase CBAM certificates to prove that the products they are importing meet the EU’s carbon standards. The price of the certificates will be based on the average weekly auction price of carbon quotas in the EU Emissions Trading System. The levies can be significant, and companies may need to reconsider their offshoring and sourcing strategies in the light of the changing dynamics.

In the short term, producers and importers will face a compliance impact, as firms begin to calculate the embedded emissions in their products, and importers deal with additional paperwork at the border. But in the medium term, the CBAM will have a strategic impact as it starts to change the behavior of either producers or purchasers. It is possible that the implementation of the CBAM could lead to another shift in global supply chains. However, the full extent of the impact of the CBAM on global supply chains is yet to be seen.

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