The Carbon Border Adjustment Mechanism ("CBAM") is a carbon tariff on carbon intensive products1 imported by the European Union ("EU"). It is a landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
CBAM is to serve as an essential element for the EU to meet the objective of the climate-neutral economy by 2050 and to address the risks of carbon leakage. It is also seen as a tool promoting decarbonization in non-EU countries.
Legislative Background
CBAM has been legislated as part of the European Green Deal which has been adopted by the European Commission (the "Commission") in December 2019 and on July 2021, European Commission adopted its proposal for CBAM.
CBAM has been entered into force on May 17, 2023, and has been passed by the European Parliament with unanimity. Pursuant to the statement made by the European Union, CBAM will take effect in 2026 will be starting with a 3-year transition period. The end of the transition period has been discussed to end on December 31, 2025.
It is important to note that financial obligations will not be imposed upon manufacturers exporting to the EU until 2026. However, it is crucial for these manufacturers to fulfill their obligation of reporting their carbon emissions accurately during this period.
Critics
The EU has faced several criticisms for its CBAM policy and the CBAM has faced severe scrutiny from many EU countries who are skeptical about the effectiveness in achieving its stated objectives.
Some critics argue that the CBAM is protectionist and could lead to trade wars at global level in the future. Also, some critics state that CBAM could be seen as a form of climate imperialism which may have a negative impact throughout the years.
There is also a concern related to the substantial costs that non-EU partners are likely to face due to increased tariffs on CBAM goods imported into the EU. Countries like Russia, Turkey, or China may be among the most impacted in terms of the value of EU imports. But low- and middle-income countries in Africa could also be affected, especially if they are dependent on exports to the EU and if the carbon intensity of their production is relatively high.
Detractors argue that the implementation of the CBAM may have adverse implications for international trade, potentially leading to trade disputes and retaliatory actions from non-EU countries. They contend that the CBAM places an inequitable burden on non-EU countries, thereby disadvantaging their exporters and creating an uneven playing field.
Additionally, the absence of a global consensus on carbon pricing and border measures poses a significant challenge, as the EU's independent adoption could hinder collaborative efforts toward coordinated climate action on a global scale. Concerns also arise regarding the complexities involved in accurately measuring and administering carbon emissions associated with imported goods. Moreover, apprehensions exist regarding the potential for carbon leakage, where companies may relocate their production to jurisdictions with less stringent climate regulations to circumvent carbon-related costs.
Another concern revolves around the non compliance of the CBAM with the Paris Agreement. The CBAM can be envisaged as departing from the Common but Differentiated Capacities and Responsibilities Principle under the Paris Agreement. Since there is no exception for the LDCs, this mechanism would penalize countries that are the least responsible for the climate crisis but the most affected by it.
Lastly, critics express concerns about the CBAM's impact on developing countries, as it may impede their economic development and exacerbate prevailing global inequalities.
Benefits
Mainly, CBAM is stated to help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes. From the EU's perspective, they must defend the CBAM as a globally beneficial policy that is consistent with WTO rules and does not target any one nation.
By phasing in the financial obligations and emphasizing the reporting requirements, the EU aims to support a gradual transition towards a low-carbon economy, while simultaneously providing manufacturers with the necessary time and resources to adapt and improve their environmental performance. This approach ensures a fair and equitable implementation of CBAM while encouraging sustainable practices in the manufacturing sector.
How it will apply in Turkey?
According to official statistics from the Ministry of Commerce, an analysis of Turkey's export data for the year 2022 reveals that approximately 40.6% of the country's total exports were directed towards the EU member countries. This places Turkey among the nations that will potentially face significant impacts from the CBAM, primarily due to its substantial trade volume and considerable export share, particularly in industries such as iron-steel, aluminum, cement, and fertilizer sectors.
Maintaining Turkey's position within the EU market and effectively addressing the requirements set forth by the CBAM are of paramount importance for the country. By proactively undertaking the necessary measures to comply with the carbon emission criteria outlined in the CBAM, Turkey can prevent this mechanism from becoming an impediment to trade between the EU and Turkey.
Exporters located in non-EU member countries, including Turkey, will be required to utilize indirect customs representatives to handle their applications and notifications under the CBAM. These representatives will act on behalf of the exporters and fulfill the necessary obligations related to the CBAM application and notification processes.
Conclusion
CBAM holds a crucial role in the EU's sustainability agenda, incentivizing non EU countries to take necessary steps in reducing carbon emissions. Despite criticisms surrounding trade impacts and administrative complexities, the EU is actively addressing these concerns to ensure a fair and effective implementation of the CBAM. By aligning financial obligations, promoting trade relations, and supporting climate goals, the CBAM plays a pivotal role in advancing a greener economy, mitigating carbon leakage, and driving global efforts in tackling climate change.
Footnote
1. Electricity, hydrogen, heat, cements, steel, aluminum, fertilizers etc.
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