Acting forcefully to address the issue of climate change, the European Commission announced at the end of 2019 the European Green Deal with the goal of achieving carbon neutrality by 2050. Soon after, the Commission accelerated its interim goal of reducing greenhouse gas emissions (GHG) by 2030 from a 40 percent reduction to a 55 percent reduction compared with 1990 levels. To meet this ambitious commitment, the European Union’s “Fit for 55” climate policy package has proposed, among other things, major reforms in the European Emissions Trading System (ETS), which are likely to sharply increase the cost paid by European firms for their GHG emissions. Recognizing that increased carbon prices would put European firms at a disadvantage in competing with imports from countries that produce without incurring these costs, the Commission tabled plans on July 14, 2021 to introduce a Carbon Border Adjustment Mechanism (CBAM) requiring that the most carbon-intensive EU imports either incur comparable carbon charges as EU firms or pay the equivalent of a carbon-based tariff.1 The CBAM aims to deter carbon leakage, which could arise if firms shift carbon-intensive production out of Europe to facilities in countries that do not tax GHG emissions (or tax at a low rate) and then export the goods to Europe.

European production and output would suffer and global climate efforts to reduce GHG emissions would be undercut. The loftier goal is to encourage other countries to follow the European example and strengthen their own national decarbonization policies, which in turn would exempt their goods from CBAM charges.