How to navigate the EU's CBAM trilemma: A review of policy objectives and possible designs.

Abstract

This article focuses on the trilemma faced by EU policymakers when balancing three conflicting policy goals of the EU in implementing the Carbon Border Adjustment Mechanism (CBAM). The first goal is to create a level playing field between EU and non-EU producers by setting a uniform carbon price across borders. The second goal is to uphold climate justice. The third goal is to encourage third countries to adopt their own carbon pricing measures thus extending the scope of a de facto climate club. The article reviews the four main approaches to navigating the CBAM trilemma and examines the resulting trade-offs between policy goals. The first approach, favoured by EU institutions, is the dual-track policy design, in which any climate justice issues raised by the CBAM pass to the remit of foreign climate aid. The second approach involves setting differentiated CBAM liabilities for third countries, depending on their level of development, or granting some of them full exemptions from the policy. The third approach is to recycle CBAM revenues back to low- and lower-middle-income countries. The fourth approach consists of enabling foreign operators to deduct voluntary carbon credits from their CBAM liabilities, thereby incentivising climate finance flows towards low- and lower-middle-income countries.