The European Union’s Carbon Border Adjustment Mechanism (CBAM), slated to take effect in January, is facing growing criticism from economists and business leaders who question its practicality and potential economic repercussions. A recently surfaced, unpublished study by Gabriel Felbermayr, former president of the Kiel Institute for World Economics and current director of the Austrian Institute for Economic Research, highlights significant concerns regarding the EU’s approach.
Felbermayr acknowledges the laudable intention behind CBAM – to mitigate the negative effects of Europe’s own CO2 pricing system – but argues that the current implementation plan is fundamentally flawed. The mechanism levies a charge on imports of carbon-intensive goods, such as steel, cement and fertilizers, from nations with less stringent environmental regulations. Critically, it requires European companies to ascertain the carbon footprint embedded within these imported products, a process deemed exceedingly difficult, if not impossible, by experts.
The process of carbon footprint determination is expected to generate substantial bureaucratic burdens for importers, potentially driving businesses to relocate outside the EU to avoid the added costs. Felbermayr advocates for alternative strategies, proposing export subsidies to counterbalance the import levy and suggesting a uniform carbon tariff rather than intricate product-specific assessments. He also proposes continuing to allocate free carbon certificates to producers of high-carbon goods, a move designed to maintain their competitiveness in the global market.
Echoing Felbermayr’s concerns, Rainer Kirchdörfer, a board member of the Foundation Family Businesses, voiced anxieties about the incomplete conception of the CBAM. He expressed worry amongst downstream processors reliant on affected precursor materials, warning of potential damage to European exports in a period of already fragile economic conditions. While Kirchdörfer affirmed the legitimacy of market-based instruments in climate policy, he underscored the urgency of a more thoroughly considered and less disruptive implementation.
The criticism highlights a deepening debate within Europe over how to effectively balance environmental ambitions with the realities of international trade and the potential for unintended economic consequences. The effectiveness of CBAM and its wider impact on European industry and global trade relations, remain to be seen, but the emerging critique raises serious questions about its viability in its current form.