‘CBAM’ carbon levy will only hit a fraction of Chinese exports to EU

(China Dialogue, 23 Sep 2021) Under the current proposal, CBAM is expected to affect less than 2% of China’s exports into the EU. Aluminium and steel imports from Russia and Turkey will bear the heavier burden.

As part of its plan to cut emissions 55% by 2030, the EU plans on introducing a carbon levy on imports of certain emission-intensive products into the EU. The idea behind the “carbon border adjustment mechanism” (CBAM) is to avoid “carbon leakage”, a situation where, because of the high cost of European climate regulation, industrial producers move their factories to regions with lower constraints on carbon emissions than the EU.

Currently, the EU protects against such leakage by allocating emission allowances to its domestic industrial plants, and providing subsidies at Member State level to compensate for higher electricity costs due to carbon pricing. In its proposed form, the CBAM would be phased in gradually between 2026 and 2035, increasing by 10% each year. At the same time, free allowances will be phased out of the EU emissions trading system at a similar pace.

Here we analyse the combined effect of phasing in the CBAM and phasing out other carbon leakage protections.

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China Dialogue, 23 Sep 2021: ‘CBAM’ carbon levy will only hit a fraction of Chinese exports to EU