As part of its Green Deal, the European Commission is considering the introduction of border carbon adjustments and alternative measures. The measures, which would primarily apply to basic materials like steel and cement, pursue a double objective: they are aimed at enhancing the effectiveness of carbon pricing for the transition to climate neutrality but also at avoiding carbon leakage risks. When implementing carbon adjustment mechanisms and alternative measures, various design options might be considered to reform the EU Emissions Trading Scheme (EU ETS). In this paper, we have decided to focus on three main models, which help to highlight the main differences between the available options. Under the first model, importers of basic materials would be required to surrender carbon allowances at the level of a product benchmark or, where lower, at the verified level of foreign carbon intensity. In parallel, allocation of free allowances would be phased out. Under the second model, a symmetric adjustment mechanism for exports and imports would be adopted, including refund to exporters for the carbon costs incurred on basic materials embodied in products. Finally, under the third model, the EU ETS would be complemented with a climate contribution charged for materials sold in the European Union (EU) at the product benchmark level related to the carbon intensity of each material. The free allowance allocation regime would then be modified to be directly linked to the volume of material production at the product benchmark level. In order to contribute to the current policy debate, we evaluate for each of these three models, their legality, coherence with EU climate objectives, effectiveness in carbon leakage prevention, potential international implications, as well as their administrative complexity and compliance costs.

Carbon border adjustment measures (CBAMs) are instruments that can be used to mitigate climate change, but also have a positive impact on trade, climate leadership and even public finance. In this article, I challenge the view that they can serve as straightforward multi-purpose instruments. In a first step, I analyse each of the purposes that can be achieved through CBAMs and explain their underlying differences. In a second step, I discuss their legal design and explain how CBAMs’ design features affect the types of purposes that they can achieve. I apply this two-step analytical framework to the European Union context, where a proposal for a regulation establishing a CBAM has been published by the European Commission in July 2021. I demonstrate that the design of the EU CBAM is inconsistent with the Commission’s main objectives of promoting fair competition and climate mitigation in line with the Paris Agreement. The EU CBAM proposal is primarily an instrument of climate leadership.

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