Industrial Decarbonisation in a Fragmented World: Carbon Pricing with Border Adjustments Using Standardized Values

Abstract

The European Carbon Border Adjustment Mechanism (CBAM) has the dual objective of preventing carbon leakage and promoting global carbon pricing. Yet pursuing both objectives at the same time might result in incomplete carbon leakage protection unless global carbon prices converge. As the current geopolitical situation makes such convergence seem unlikely in the near future, an extension of free allowance allocation is being discussed for affected sectors. This would, however, mute most carbon pricing incentives and reduce revenues. A reform of the EU´s CBAM to use standardized values should be contemplated as a pragmatic bridging option until progress on global carbon pricing materializes. It could ensure effective protection against leakage, ensure carbon pricing incentives along the value chain, and raise stable revenues to fund green industrial investments. Thereby, it would enhance investment stability, support industrial transformation, and offer a WTO-compliant solution to carbon leakage risks in a fragmented global policy landscape.