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Analyzing the European Union’s Carbon Border Adjustment Mechanism
Proposed CBAM is an import tariff on carbon-intensive goods from abroad. It is applied as an import tax paid by the importer when products enter the European Union, specifically through the purchase of certificates representing embedded emissions in the goods. The cost of certificates will be based on the price of carbon in the EU ETS. By assigning such a carbon price to imports, the CBAM aims to level the playing field by taxing foreign production with less-stringent emissions regulations and reducing the risks of leakage
Analyzing the European Union’s Carbon Border Adjustment Mechanism
In December 2022, negotiations between the European Commission, European Parliament, and European Council reached a provisional agreement over the details of the carbon border adjustment mechanism (CBAM) set to be implemented by the European Union. Information about this trilogue agreement has been disclosed in press releases and a preliminary official document published by the European Council. The agreement needs to be confirmed by member states and the European Parliament before it is final, with a transitional reporting-only period starting in October 2023 and surrender of carbon certificates for imports in January 2026. This brief examines the policy developments that spring from this agreement and analyzes their implications for transatlantic trade, the World Trade Organization (WTO), and potential policy developments in the United States. There are several proposals for how the United States might respond to, and potentially collaborate with, Europe as the CBAM is implemented. This brief aims to inform U.S. policymakers about the intentions, secondary motivations, and outlook for this first-of-a-kind policy.
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