There is a risk that companies under the ETS will leave the EU to avoid paying for their CO₂, commonly referred as “carbon leakage”. To prevent unfair competition between Europe and the rest of the world, the EU has set up the Carbon Border Adjustment Mechanism (“CBAM”). Companies exporting iron and steel, cement, aluminium, fertilizers and electricity to Europe will also be obliged to pay for their CO₂ emissions. In other words, the EU links the rest of the world to its European ETS. The pilot phase of the CBAM will start in October 2023. By 2030, all goods covered by the ETS should be included .
The EU hopes that the CBAM will lead to more ambitious climate policy in the three biggest economies, China, India, and the United States . Critics have warned of the potential economic harm of the CBAM to the Global South. Developing countries may struggle to decarbonize quickly enough to remain competitive in the global market, as the transition to a low-carbon economy requires technology and investment beyond the resources of many countries. Technology transfer and green financing are possible solutions .