Bold initiatives for carbon leakage
The European Union (EU) stands out for its bold initiatives on preventing climate change. The EU’s Carbon Border Adjustment Mechanism (CBAM) is one such initiative for imposing additional import duties on certain products in accordance with their carbon content to discourage carbon-intensive imports.
- The CBAM aims to address the issue of carbon leakage that has been the EU's concern for a long time. The underlying idea is to create a level playing field for production units in the region vis-à-vis imports from countries with ‘laxer’ environmental regulations.
- The EU defines carbon leakage as “the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints"; this could lead to an increase in their total emissions.
- Under the new mechanism, exporters of energy-intensive goods to EU countries would be charged gate-money in accordance with the carbon prices applicable had they been produced within the region, in an attempt to deter producers from shifting production outside the EU and importing goods instead.
- As its member states are also signatories to the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO), it may be pertinent to examine whether the EU’s additional duties would be compatible with provisions under the GATT and WTO agreements.
- The Paris Agreement, which came into force in November 2016, is a legally-binding international treaty on climate change adopted by 196 parties.
- Through this agreement, they aspired to reduce greenhouse gas emissions by developing strategies, technologies, capacity, and sources of finance for mitigation and adaptation.
- The CBAM would be a step in the direction of making the EU carbon-neutral by 2050, as envisaged under the Paris Agreement.