Carbon border levies or taxes, which impose a carbon price on imports from higher polluting countries, can help tackle these risks and protect decarbonising industries from unfair competition.

The European Union has become the first region in the world to put in place such a levy. Known as the Carbon Border Adjustment Mechanism, the CBAM, which will become operational in 2026, aims to tackle these risks as well as address concerns about so-called carbon leakage, the unproven contention that industries relocate when forced to pay for their emissions.

By phasing out free allocations under the European Union’s Emissions Trading System (EU ETS), the CBAM will eventually ensure that EU heavy industries will start paying a carbon price for their pollution, finally reinforcing the ‘polluter pays’ principle. However, at present, the phasing out of free allowances is too slow and must be accelerated. The fact that only direct emissions will initially be included is also another problem with the CBAM, as it should include indirect emissions from the start.

Another drawback of the CBAM in its current form is the unclarity in the use of the revenue it will generate. At present, CBAM revenue will be earmarked for the EU’s “own resources”, but no further indication is given to how this will be spent. To ensure compliance with international trade rules and a fair global transition, CBAM revenue should go in its entirety to supporting climate action in vulnerable countries.

If the CBAM is to become an effective climate tool, these shortcomings must urgently be addressed.