Environmental Taxation

Katrina Attard

S. 4921. Introduction

The European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) aligns with the objectives of the Paris Agreement and the EU Green Deal while also incorporating principles of fairness in international trade as recognized by the World Trade Organization (WTO). By ensuring that market operators are subject to equal treatment, the CBAM seeks to prevent competitive distortions and promote a level playing field.

The primary objective of the CBAM is to mitigate carbon leakage, a phenomenon where companies relocate production outside the EU to avoid stricter environmental regulations. To address this issue, the CBAM imposes a carbon price on imported goods with high emissions ensuring that both EU and non-EU producers face comparable costs. This mechanism aims to foster fair competition while incentivizing lower emissions globally.

The CBAM is structured into two distinct phases: a transitional phase that commenced in October 2023 and a definitive phase set to begin in 2026. Established under Regulation (EU) 2023/956, the mechanism aims to ensure a fair carbon price on imported goods while preventing carbon leakage. The transitional phase allows businesses t...