The Carbon Border Adjustment Mechanism: Plugging The Carbon Leak

1. Introduction

The EU's Carbon Border Adjustment Mechanism ("CBAM") regulation officially entered into force on 17 May 2023 (see here). The CBAM works in a similar way to the EU's Emission Trading System ("EU ETS"), by creating a market mechanism that puts a price on carbon, but unlike the EU ETS, which prices carbon emitted by EU producers, the CBAM will price the carbon emitted by non-EU producers importing into the EU. This is designed to put EU and non-EU producers on a level playing field by equalising the tariffs they pay on carbon. During CBAM's transitional period, which will run from 1 October 2023 to the end of 2025, traders will be required to report on the quantity of goods which will be covered by CBAM, the goods' embedded and indirect emissions, and the carbon price due in the country of origin. Then, from 1 January 2026, relevant entities importing carbon-intensive goods into the EU will be required to pay a levy on the embedded emissions of those