EU Implements a Carbon Border Adjustment Mechanism to combat Carbon Leakage to Third Countries

The EU has had a carbon market for industrial installations since January 2005. It is known as the EU emissions trading system or EU ETS. The EU ETS works on the “cap and trade” principle: a cap is set on the total amount of certain greenhouse gases that can be emitted by the operators covered by the system.

These practices generate “carbon leakage”, which the EU now addresses through the Carbon Border Adjustment Mechanism (or CBAM).

While the objective of the CBAM is to prevent the risk of carbon leakage, it could also encourage producers from third countries to use technologies that are more efficient in reducing greenhouse gases so that fewer emissions are generated. For that reason, the CBAM is expected to support the reduction of greenhouse gas emissions in third countries.