Nov. 25, 2024 • Reading time: 13 Min
The Carbon Border Adjustment Mechanism (CBAM) is an important step in EU climate policy. Its aim is to regulate CO₂ emissions from imported goods. Developed as part of the EU Green Deal, the carbon border levy combats the problem of carbon leakage. This means that companies in Europe should be able to compete fairly. For business leaders and people who care about the environment, CBAM brings both opportunities and challenges in our global economy. In this article, we look at how the mechanism works, what effects it has on different industries and why it is important for a sustainable future.
The Carbon Border Adjustment Mechanism (CBAM) is a central instrument of EU climate policy that aims to regulate the CO₂ emissions of imported goods and thus prevent the phenomenon of carbon leakage. This mechanism is intended to ensure that European companies are not disadvantaged by their climate protection measures, while imports from countries with lower environmental standards are subject to the same CO₂ costs. In addition to creating a level playing field, the CBAM also aims to promote global climate protection measures by motivating trading partners to introduce their own carbon pricing systems. The revenue from the mechanism flows into sustainable projects that further promote climate protection.
The CBAM works by purchasing CO₂ certificates, which importers have to buy for the emissions of imported products. These costs are based on the EU Emissions Trading System. Companies are obliged to calculate and report the carbon footprint of their products, whereby countries with comparable climate protection measures can be exempted from the payments. Particularly affected are emissions-intensive industries such as steel, cement, aluminium, fertilizers and electricity, which receive incentives for sustainable production methods through the mechanism.
The mechanism offers companies a wide range of opportunities. It drives innovation, promotes the introduction of low-emission technologies and strengthens regional value chains. CBAM also creates planning security through standardized CO₂ price models. At the same time, the mechanism brings challenges, including cost increases for importers, increased administrative requirements and potential trade conflicts. Developing countries could also be at a disadvantage, as their exports will become more expensive as a result of the new regulations.
To adapt to CBAM, companies should analyze their supply chains, invest in sustainable technologies and automate processes to meet the new requirements. Transparent reporting and collaboration within the industry are also essential to reduce emissions and secure competitive advantages.
CBAM is not only a significant step towards a climate-neutral economy in the EU, but could also serve as a model for other regions and drive forward global climate protection measures. Companies that focus on sustainability at an early stage have the opportunity to strengthen their competitiveness and play a pioneering role in the transformation to a more sustainable economy. The mechanism offers challenges, but also immense potential to pave the way to a more environmentally friendly future.
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The Carbon Border Adjustment Mechanism (CBAM) is an instrument of the European Union. It aims to adjust imports from countries with lower climate protection standards to the European CO₂ price. It is a central component of the EU Green Deal and the Fit for 55 package, which aim to reduce the EU's greenhouse gas emissions by 55% by 2030 compared to 1990 levels.
In order to ensure the competitiveness of European companies and achieve environmental targets at the same time, the CBAM requires importers to purchase CO₂ certificates for certain products. These certificates reflect the CO₂ costs that European manufacturers already have to bear as part of the EU Emissions Trading System(EU ETS).
The mechanism focuses in particular on emissions-intensive industries such as steel, cement, fertilizers, aluminium and electricity. This focus is on industries that are particularly susceptible to carbon leakage - the phenomenon whereby companies relocate their production to countries with less stringent climate protection measures in order to save costs.
The CBAM was introduced to reduce carbon leakage. This is the relocation of CO₂-intensive production from the EU to countries with less stringent climate protection requirements. The CO₂ border adjustment system is intended to prevent precisely this and contribute to climate protection at the same time. At the same time, the mechanism should serve as an incentive for third countries to tighten their own climate protection measures and contribute to global CO₂ reduction.
The CBAM has been in a test phase since 2023, during which companies are already required to submit initial data on the CO₂ emissions of their imported products. Full implementation, which also includes financial obligations, is planned for 2026. The mechanism therefore represents an important step towards strengthening climate protection in the EU and worldwide.
The carbon tariff aims to reduce CO2 emissions in particularly emissions-intensive industries. Due to their high energy and resource consumption, these industries account for a significant proportion of global greenhouse gas emissions and are the focus of the first implementation phase of the mechanism.
steel industry:
Steel production is one of the largest global sources of CO₂ emissions, with the use of coal in blast furnaces having a particularly serious impact. Products such as crude steel, rolled steel and steel pipes therefore fall under the CBAM.
A key objective is to promote low-emission alternatives, particularly through innovative technologies such as green hydrogen production and the use of electric arc furnaces. These approaches not only promise to reduce CO₂ emissions, but also provide significant support for the sustainable transformation of the steel industry.
Cement production
Cement is a key material in the construction industry, but its production contributes significantly to global CO₂ emissions, both due to the high energy consumption and the chemical processes involved in the production of clinker, a main component of cement.
A key objective is to create incentives for the development of lower-emission production methods and research into alternative binders. These measures are intended to promote a more environmentally friendly approach to cement production and strengthen the competitiveness of sustainable processes on the global market.
aluminum industry:
Aluminum plays an important role in industry, particularly in the automotive and packaging sectors. Despite its wide range of applications, the production of aluminum requires a considerable amount of energy. The CBAM covers both primary aluminum as well as aluminum sheets and profiles in order to regulate the market conditions for companies.
A key objective is the promotion of recycling methods and the development of technologies that are less energy-intensive. These measures are intended to promote more sustainable production and reduce the ecological footprint of the aluminum industry.
Fertilizer industry:
The production of fertilizers, especially those based on ammonia, releases considerable amounts of carbon dioxide (CO₂) and other climate-impacting gases such as nitrous oxide (N₂O). This applies in particular to nitrogen fertilizers, phosphate fertilizers and their precursors.
The aim is to create incentives to increase efficiency and promote the introduction of low-emission production methods.
Electricity:
Electricity generated from fossil fuels and imported into the EU is also subject to the applicable regulations. This particularly affects countries that rely heavily on coal or natural gas to generate electricity. The overarching aim of these regulations is to promote the transition to renewable energies and emission-free electricity sources in order to make a sustainable contribution to climate protection.
A key objective is to prevent carbon leakage, i.e. the relocation of CO₂-intensive production to countries outside the EU where CO₂ costs are lower or non-existent. Without such a mechanism, companies could relocate their production abroad in order to avoid the CO₂ price in the EU. This would undermine the EU's climate protection efforts and possibly even lead to an increase in global emissions. The CBAM ensures that climate protection measures within the EU are not undermined by loopholes on the global market.
The CO₂ compensation system should not only work within the EU, but also have a global impact on climate protection. By subjecting imports from countries with lower climate protection standards to CO₂ pricing, these countries are motivated to introduce their own CO₂ pricing systems and reduce their emissions. In this way, the CBAM supports the worldwide achievement of the climate targets of the Paris Agreement and contributes to limiting global warming.
Another aim is to ensure fair competition between European companies and their international competitors. As European producers already pay for their CO₂ emissions under the EU Emissions Trading System (EU ETS), the CBAM ensures that imports are not cheaper simply because of lower environmental standards. A level playing field strengthens the domestic industry and ensures that companies are not disadvantaged by climate protection measures.
The revenue from the sale of CBAM certificates is to flow into sustainable projects that further promote climate protection within the EU. These funds could be used to finance innovations, accelerate the transition to a climate-neutral economy or support companies and households with decarbonization.
The customs duty aims to establish a globally harmonized pricing of CO₂ emissions in the long term. By implementing such a mechanism, global markets could be uniformly geared towards climate protection, which would make a decisive contribution to reducing global CO₂ emissions. This goal underlines the role of the European Union as a pioneering player in climate protection and points the way to an internationally coordinated and effective climate policy.
The Carbon Border Adjustment Mechanism was introduced to create fair competitive conditions between European and non-European manufacturers. The aim is to charge the CO₂ emissions of products imported from non-EU countries with the same costs as products produced within the European Union. The functioning of this mechanism can be divided into three central steps:
Step 1: Purchase of CO₂ certificates
Importers who import goods into the EU must purchase CBAM certificates for the CO₂ emissions associated with the production of these goods. The price of these certificates is based on the EU Emissions Trading System, which already regulates CO₂ emissions within the EU. This ensures that imports are subject to the same CO₂ costs as goods produced in the EU.
Step 2: Calculation and reporting of CO₂ emissions
Importers are obliged to calculate and regularly report the exact CO₂ emissions of imported products. This calculation covers the entire manufacturing process of the goods in order to present the actual emissions transparently. If no specific emissions data is available, standard values based on the average emissions for the respective industry can be used.
Step 3: Exemption for comparable climate protection measures
Products imported from countries that have already introduced comparable climate protection measures could be fully or partially exempt from payments. This is intended to ensure that countries with their own CO₂ pricing system or similar environmental requirements are not burdened twice. To this end, the EU examines the climate policy of the country of origin and decides whether an exemption is possible.
Summary of the processes
The mechanism is designed to regulate the import of goods into the EU according to the same environmental standards that apply to European companies. It ensures a level playing field, promotes transparency and provides a strong incentive for international climate protection measures.
Carbon offsetting offers companies a wide range of opportunities, especially for those who are early adopters of sustainable strategies. The focus on climate protection and fair competition creates new opportunities for innovation, market positioning and long-term planning.
Incentive for sustainability: The CBAM encourages European companies to make their production processes more sustainable. This concerns both the introduction of energy-efficient technologies and the use of low-emission raw materials.
Promotion of key technologies: Companies that develop and use technologies with low CO₂ emissions can gain a competitive edge. These technologies not only make companies more competitive, but also help to set new standards for the entire industry.
Sustainability as advantage for sales: CBAM strengthens the demand for sustainably produced goods. Companies that can demonstrate environmentally friendly production processes have a competitive advantage - both within the EU and on international markets. Sustainability is increasingly becoming a key factor for consumers and business partners, and companies are now benefiting from this.
Pioneering role in climate-friendly production: Companies that switch to climate-friendly production at an early stage can position themselves as pioneers of sustainability. This not only strengthens their image, but also their negotiating position in international markets.
Clarity on CO₂ costs: The carbon border adjustment establishes a standardized system that supports companies in more accurately estimating the expenses for CO₂ emissions in global trade. This clarity promotes long-term planning and enables companies to make targeted strategic investments.
Investing in climate-friendly technologies: A clearly defined framework for carbon pricing allows companies to invest more confidently in innovative solutions and technologies, thereby reducing costs and gaining a competitive advantage in the long term.
Fair competition: The border adjustment system ensures that European production sites are protected against unfair competition from imports from countries with lower environmental standards. This is intended to strengthen the domestic economy and create incentives to expand production capacities within the EU.
Promoting regional supply chains: In view of rising import costs, local and regional supply chains are becoming increasingly important. This could contribute to increased value creation within Europe and reduce dependence on external countries.
Despite its advantages, the mechanism also poses risks and challenges for companies, international trade relations and developing countries. In order to deal successfully with the mechanism, companies must adapt to the changes at an early stage. We summarize the key risks and examples below:
Complexity of data collection: companies must prepare and submit detailed reports on the CO₂ emissions of their imported products.
New reporting obligations: The introduction of CBAM requires additional resources for compliance with reporting obligations and the establishment of corresponding systems.
Financial burden for importers: The purchase of CBAM certificates increases the import costs for products that originate from countries with lower climate protection requirements.
Investment required for conversions: Companies may need to invest in new technologies in order to remain competitive.
Resistance from trading partners: Countries without comparable CO₂ pricing systems could view the border adjustment as a protectionist measure and initiate countermeasures.
Regulatory uncertainties: International organizations such as the WTO examine whether CBAM is compatible with the rules of free world trade.
Disadvantage for exporting countries: Developing countries whose industries rely heavily on exports to the EU could be significantly burdened by the additional costs.
Risk of economic disparities: The additional expenditure could restrict exchanges between the EU and developing countries, which would hinder their economic progress.
Unclear effects: During the test phase from 2023 to 2026, it remains unclear to what extent the CBAM will actually have an impact on companies and trade players.
Expansion to other sectors: The prospect of extending carbon offsetting to other sectors in the future could pose a potential challenge.
The CO₂ border adjustment system will have a major impact on various areas within the EU and internationally. The focus is particularly on high-emission industries, which are affected by both the expenditure on CO₂ certificates and new regulations. While some sectors face significant difficulties, others have the opportunity to achieve long-term benefits through innovation and sustainable approaches.
The steel industry is one of the sectors with the highest CO₂ emissions, particularly due to the use of coal in blast furnaces.
Challenges:
Potential: Promotion of innovations, such as the use of electric arc furnaces, which can significantly reduce CO₂ emissions.
Cement production causes high CO₂ emissions, both through energy consumption and chemical processes.
Difficulty:
Possibilities: Incentives for the development of low-emission production processes and alternative binding agents such as carbon capture technologies. Carbon capture technologies (CCS - Carbon Capture and Storage) are processes with which CO₂ is captured from industrial processes or directly from the air, transported and stored in the long term. They aim to reduce emissions in areas that are difficult to decarbonize. These include industries that produce steel, cement or energy. The captured CO₂ is stored in geological formations such as depleted natural gas fields or saltwater aquifers. Although these technologies can play an important role in achieving climate targets, they face challenges due to high costs, high energy consumption and ensuring long-term storage.
Due to its high energy consumption, aluminum production is particularly harmful to the climate, which makes imports from countries without CO₂ pricing very expensive.
Problem:
Promise: Promotion of aluminum recycling within the EU, which is significantly less CO₂-intensive than the production of primary aluminum.
The production of fertilizers is a major CO₂ emitter due to the use of fossil fuels and chemical processes.
Obstacles:
Opportunities: Incentives to develop environmentally friendly alternatives, for example through the use of green ammonia. Green ammonia refers to ammonia (NH₃) that is produced in a climate-neutral way by combining green hydrogen and nitrogen, using renewable energy sources. It acts as an emission-free raw material for the production of fertilizers, as an energy source and as a storage medium for hydrogen. Green ammonia has considerable potential for the transition to sustainable energy, but is a challenge due to its high energy requirements and current costs. As a flexible and transportable energy carrier, it could replace fossil fuels in industry and energy supply.
Electricity generation is particularly affected if it is based on fossil fuels. Imports of electricity from coal or gas-fired power plants fall directly under the CBAM.
Confrontation:
Chance: Promotion of investments in renewable energies and cross-border cooperation in the field of clean energy.
With the potential expansion of the carbon tariff to additional sectors such as the chemical industry, paper production or the food sector, the influence of this mechanism will continue to grow in the coming years. Companies that invest early in sustainable practices and low-emission technologies can see this challenge as an opportunity to establish themselves as pioneers in climate protection in the long term. The CBAM is forcing various industries to adapt their business models to the requirements of a climate-neutral economy while maintaining their global competitiveness.
The border adjustment can strengthen the international competitiveness of European companies in several ways. By specifically linking climate protection and economic incentives, the CBAM promotes fair competitive conditions, innovation and a pioneering role for the EU in global climate protection.
Creation of fair competitive conditions
One of the main objectives of the CO₂ border tax is to prevent unfair trading practices in which imports from countries with less stringent environmental regulations are offered at lower prices.
Promotion of innovation
The mechanism provides a clear incentive for companies to invest in low-emission technologies and thereby achieve competitive advantages.
Signal effect for global climate protection standards
The CBAM not only has an impact within the EU, but also sends a strong signal to international trading partners.
Despite the positive aspects mentioned, carbon offsetting also poses challenges that can affect the international competitiveness of EU companies. Higher production costs, potential trade conflicts and possible disadvantages on global export markets are key issues that require strategic planning and adaptation.
Increased production costs in the EU
The CBAM and the associated environmental regulations could lead to companies in the EU having to bear higher production costs than their international competitors.
Potential trade conflicts
The carbon border adjustment could be seen by non-EU countries as a protection-oriented measure and tempt them to take countermeasures.
Effects on export markets
Rising production costs within the EU could also have a negative impact on the exportability of European products.
The Carbon Border Adjustment Mechanism will change the structure of global supply chains. Companies are faced with the task of reanalyzing their sources of supply in order to reduce costs and maintain their market position. One key strategy is to realign relationships with suppliers by giving preference to partners from countries with similar climate protection standards. This could replace raw material imports from emission-intensive manufacturers with more environmentally friendly options. At the same time, the diversification of supply chains is becoming increasingly important in order to more effectively mitigate risks such as trade disputes or unexpected expenses.
The promotion of regional production is also supported. More and more companies are relying on local value chains and European suppliers to avoid the purchase of CO₂ certificates. Suppliers that invest in low-emission technologies could be favored in the long term, as they make a significant contribution to reducing environmental impact.
The pressure on suppliers to adapt is also increasing. Companies are demanding more accurate carbon footprints and proof of sustainability, which makes it necessary to implement carbon monitoring systems along the entire supply chain. Sustainability is therefore becoming a decisive criterion in the selection process, influencing the competitiveness of suppliers.
Logistics must also adapt. Means of transportation with lower emissions, such as rail, could be preferred, while shorter transport routes could further reduce CO₂ emissions. However, increased logistics costs could be passed on to companies as a result of CBAM requirements, which would have an impact on final costs.
Effective risk and opportunity management is essential to counter these changes. Companies need to develop strategies to avoid supply chain disruptions caused by new regulations or trade conflicts. At the same time, adapting to sustainable supply chains offers opportunities: they can strengthen their market position and be perceived as pioneers in an increasingly climate-oriented economy. CBAM therefore not only influences existing structures, but also opens up new avenues for future-proof and sustainable supply chain design.
In order to adapt effectively to the CO₂ border tax, companies should carry out a comprehensive analysis of their supply chain. This should include determining the carbon footprint of manufactured products at every stage of production and transportation. The aim is to identify emission-intensive processes and optimize or replace them if necessary. Such an analysis makes it possible to replace emitting materials and integrate alternative, more sustainable raw materials into the production process.
Companies should actively invest in sustainable technologies. These include energy-efficient devices and systems that both minimize resource consumption and reduce emissions. The use of renewable energies, such as solar panels or wind power, can also make a significant contribution to reducing CO₂ emissions. In the long term, such investments not only lead to a reduction in emissions, but also to cost savings through lower energy costs.
Employee training and awareness-raising on sustainability and adaptation to CBAM should not be ignored. Training can help raise awareness of environmentally friendly practices and empower employees to actively contribute to reducing the company's carbon footprint.
The introduction of a transparent system for sustainability reporting is also important. Companies are required to provide regular information on their progress in reducing CO₂ emissions and the associated measures. This also includes reporting on measures to comply with carbon offsetting. This not only promotes the credibility of the company, but can also serve as a competitive advantage to attract stakeholders willing to invest.
Another strategy is to collaborate with other companies and stakeholders within the industry. By sharing best practices, experiences and resources, companies can learn from each other and develop joint solutions that further minimize CO₂ emissions. Networks to promote sustainability can play a supporting role here.
Data analysis and management
Technological solutions for data collection and analysis are necessary to effectively measure and manage the environmental footprint. With the help of software tools, companies can collect and analyze accurate data on their energy consumption, emissions and material flows. This information is essential for making informed decisions to reduce emissions and ensure CBAM compliance.
Automation of processes
Production and logistics processes can be made more efficient through the use of modern automation technologies. Automation can not only stop material waste, but also reduce energy consumption in production. For example, the intelligent control of machines and systems can optimize operations and minimize energy consumption at the same time.
Integration of artificial intelligence (AI)
The use of AI technology can help companies make predictive decisions to minimize CO₂ emissions. AI can be used to develop knowledge databases to optimize material selection and production processes. Machine learning can be used to identify patterns that indicate optimization potential in the supply chain.
Support with compliance requirements
Technological solutions can also help companies to comply with CBAM requirements. Special software solutions help to collect and process all the data required to comply with CO₂ limits. Companies are thus able to continuously monitor and adapt current information on emissions-related regulations and requirements.
Platforms for the exchange of best practices
Technologies can also promote the exchange of best practices and experiences between companies. Through online platforms and networks, companies can share knowledge about emission-reducing practices, offer training or initiate innovation projects that contribute to CBAM compliance.
Adapting to the Carbon Border Adjustment Mechanism requires a strategic approach and the use of modern technologies. Companies that proactively invest in evaluating their supply chains, adopt sustainable technologies and train their employees can not only reduce their environmental footprint, but also strengthen their competitiveness in the market. The use of technological solutions for data collection, process automation, AI and compliance management plays a crucial role in implementing these strategies. By combining innovative approaches with a clear objective, companies will be able to successfully overcome the challenges and make a positive contribution to sustainability at the same time.
The Carbon Border Adjustment Mechanism represents significant progress in climate policy and offers companies both challenges and opportunities. By promoting environmentally friendly technologies, the Carbon Border Adjustment Mechanism creates a fair competitive environment and enables companies to increase their competitiveness in the long term.
In the future, the development of the carbon tariff will depend heavily on global climate protection measures. The EU is likely to further refine existing mechanisms and introduce new emission standards, forcing companies to adapt their strategies. In addition, the model could serve as inspiration for other regions, which could lead to a global harmonization of CO₂ prices and thus have a lasting impact on international trade.
The impact extends beyond Europe; exporting companies outside the EU must prepare for potential CO₂ costs and adapt their own standards. At the same time, the CO₂ border tax can promote international cooperation and support the exchange of knowledge in order to jointly combat climate change.
Overall, CBAM offers not only regulatory challenges, but also opportunities for companies to actively shape a more sustainable future. A proactive approach not only makes it possible to meet the requirements, but also to be a leader in the global sustainability movement. The carbon border adjustment mechanism could thus bring about a fundamental change in the corporate landscape - characterized by innovation, collaboration and a clear focus on sustainability. So companies can setting the course for a greener world in future.
