New Standard in Global Trade: EU ETS and the Role of CBAM

From ETS to CBAM: How Europe's Twin Carbon Regulation Shapes Global Supply Chains

The European Union's climate policy is built on two key mechanisms that are reshaping global trade: The Emissions Trading System (ETS) for producers within the Union and the Border Carbon Adjustment Mechanism (CBAM) for products coming from outside the Union. How do these two systems relate to each other and how do they transform together?

The Inside System: The EU Emissions Trading System (ETS) and "Carbon Leakage"

The EU Emissions Trading System (ETS) is a mechanism to control the carbon emissions of European producers. Under this system, if a firm's emissions are above set limits, it must pay a price for this excess by purchasing carbon credits from the market. This functions as a kind of carbon tax for firms in the EU, which has been in place for years.

But this system has led to a major problem: "carbon leakage". In order to avoid this additional tax burden, some European firms started to shift their production to countries like Turkey, where there was no similar tax at the time.

The External Stabilizer: How does CBAM work?

The Border Carbon Adjustment Mechanism (CBAM) is designed to prevent exactly this "carbon leakage". Its basic logic is quite simple: "If a European firm pays a tax through the ETS, goods from outside Europe should be subject to a similar tax through CBAM." In this way, the cost of carbon is equalized wherever production takes place, creating fair competition.

CBAM's Strategic Move: Promoting National ETSs

While taxing outsourced products, CBAM also offers a strategic incentive mechanism. The EU is almost saying to countries like Turkey: "Set up your own national Emissions Trading System (ETS)." If a country establishes its own ETS, instead of paying the carbon tax to Europe through CBAM, producers in that country pay it to their own country's treasury. In this way, the revenue from the carbon tax stays in Turkey instead of going to Europe. In this respect, CBAM aims to create equal competitive conditions for both internal and external firms.

The Economic Cost of Dirty Production and Preventive Approach

With CBAM, "dirty", i.e. high emission production is no longer only an environmental problem, but also a serious economic burden. Companies engaged in dirty production lose their competitiveness due to high taxes and this directly threatens their commercial future. For a sustainable future, it is no longer an option but a necessity for companies to switch to cleaner production.

This approach is like "preventive treatment" in medicine: It is always easier, cheaper and more effective to prevent a disease in the first place, rather than trying to treat it after the fact. Instead of "curing" companies with heavy tax penalties, CBAM encourages them to adopt clean and "healthy" production models from the outset.