Subsidy-Related Aspects of the EU Carbon Border Adjustment Mechanism (CBAM)

Abstract:

With the introduction of a Carbon Border Adjustment Mechanism (CBAM), the European Union (EU) hopes to avert greenhouse gas (GHG) emissions leakage by extending the domestic carbon price to imports of certain goods covered by the EU Emissions Trading System (EU ETS). Leakage can also affect exports, however, when European goods lose market share abroad and are substituted by more emissions-intensive goods from third countries. Despite concern about this potential leakage channel, the CBAM does not make any provision for exports and merely requests the European Commission to monitor, periodically report on and if necessary respond to the risk of export-related leakage.

This article evaluates the potential for export-related leakage in the context of the CBAM, and discusses different options to address such leakage. In doing so, it also explores the implications of recent efforts to increase support for industrial decarbonization in Europe as a reaction to extensive subsidies introduced under the Inflation Reduction Act (IRA) in the United States, as well as the evolving role of international trade law and the World Trade Organization (WTO).