Business Implications from Regulating Carbon Emissions in the EU

In the beginning of the 21st century, the European Union (the EU) had led the global fight against climate change with a wide array of policy measures. The EU’s primary approach to climate policy had been taxation via the European Union Emissions Trading System (EU ETS), the first carbon cap-and-trade regulation. EU ETS was a market-based solution designed to reduce GHG emissions by setting an upper limit on domestic emissions. However, the effectiveness of EU ETS had been debated since its inception in 2005. Years later in July 2021, the EU proposed implementation of a Carbon Border Adjustment Mechanism (CBAM), a carbon border tax intended to address business competition challenges plaguing EU ETS by establishing comparable carbon costs within EU borders for imports and local goods. Nevertheless, the CBAM proposal was also met with considerable skepticism. The potential enforcement of CBAM raised several questions for cement and steel producers around the world. First, what would be the impact on their strategies and financial performance? Second, what actions could they take in response? Stakeholders in other industries that relied on cement and steel to produce their own goods pondered the same questions. In addition, several questions emerged about the potential impact of CBAM on carbon emission reductions both in the EU and in other jurisdictions. Would CBAM be effective at reducing emissions and addressing emissions leakage? How would other countries respond to CBAM and would the response affect those countries’ carbon emissions reduction efforts?