The United States Should Learn to Live with EU CBAM

In December, policymakers in the European Union made a significant stride in efforts to address climate change. The European Union’s parliament, member states, and commission in Brussels agreed to the terms of a carbon border adjustment (CBAM), which will levy a tariff on some imports into the European Union based on their emissions. This implementation of a border adjustment is the first of its kind and another potential source of tension as countries try to navigate the confluence of climate strategy and trade rules.

For Europe, the CBAM is a critical component of their climate plan. As the European Union ramps up its efforts to reduce emissions with its cap-and-trade system, the border adjustment is meant to prevent emitters from packing up and leaving the European Union, and avoiding the tightening regulation while maintaining market access through trade. The move reaffirms the European Union’s sense of climate leadership as policymakers there can also say that this is a way to incentivize foreign producers to produce more cleanly.

The CBAM has been in development for some time. Under the European Union’s newest agreement, companies that import covered goods into Europe will have to report the emissions associated with their products starting in October. This will apply to importers of iron and steel, aluminum, cement, fertilizer, electricity, and hydrogen. The next few years will be practice for when the European Union starts charging for emissions certificates in 2026. By 2030, the European Union hopes that every sector covered by its emissions trading system will be subject to the border adjustment.

It should be no surprise that the biggest exporters of carbon-intensive goods into the European Union are up in arms. The BRIC countries have called it discriminatory, unilateral, and in violation of World Trade Organization (WTO) rules. Before its invasion of Ukraine and the resulting sanctions, Russia was the top exporter of the goods that will be covered by the CBAM, according to researchers from adelphi. China was second and India was eighth. For these countries, the CBAM is a source of disruption and makes their exports into Europe less competitive. Brazil was 11th, just behind the United States.

Carbon-intensive exporters will take their case to the WTO. Trade experts fall on both sides of how the WTO might rule in the case of the EU CBAM. If countries are not satisfied by the WTO process, then the CBAM might become another reason to install retaliatory tariffs or start new trade conflicts. The weight of coordinated opposition will pressure Europe’s plans, though the continent seems undaunted for now.

The United States could play a helpful role here, politically supporting the European Union’s efforts and engaging constructively to help U.S. firms comply with the new reporting requirements. The stakes for the United States are smaller than many other economies as most of our exports to Europe are not covered by CBAM, even energy products like oil and natural gas. But the United States’ stake in both the development of low-carbon markets and border adjustments as a policy tool is potentially quite large.

For the goods covered by Europe’s new rule, the United States has a distinct advantage of being more carbon-efficient than its peers. Relative to Chinese steel, U.S. production is cleaner. So while U.S. steel exports might face a 6 percent price increase in European markets, Chinese exports will face an 18 percent increase, according to estimates from the Boston Consulting Group. As trade reorganizes around the EU CBAM, U.S. producers may just discover new opportunities.

The potential benefits are there on the policy side as well. While decarbonizing U.S. and European economies is essential, global climate outcomes depend on global decarbonization. Policies like the CBAM provide an opportunity for the European Union, and potentially the United States, to use their market power to incentivize decarbonization. One source of U.S. opposition to the European Union plan has been that the United States is not quite ready to partner up on a CBAM. A fair number of U.S. policymakers would like to support a U.S. CBAM to ensure China and other countries cannot emit, and import, while the United States goes about decarbonization. While the United States has a lot of work to do before it can partner up with the European Union in assessing border adjustments or forming a climate club, that option looks better if Europe can make this one work.

The European agreement on the CBAM comes at a critical juncture in transatlantic—and global—cooperation on trade and climate. Because combating climate cooperation is a global commons problem, countries and blocs with ambitious emissions reduction plans cannot risk the offshoring of emissions to countries with less stringent regulation. As Europe takes the next steps forward, the United States affirmatively reinforcing the CBAM would have a net positive impact for long-term U.S. climate leadership by bolstering the transatlantic alliance and distinguishing it from countries with more protectionist and polluting tendencies.

Joseph Majkut is director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

This commentary was made possible by support from Dow.

Joseph Majkut
Director, Energy Security and Climate Change Program