The Trojan horse is the simple idea that countries and trading blocs can ensure a level playing field for their own industries, which are required to follow relatively higher standards, by taxing imported goods if their associated greenhouse gas emissions haven’t already been taxed at source.

The two phalanxes of Greek soldiers it releases, manage to both:

1. solve the problem of carbon leakage; and
2. internalise the social cost of carbon far beyond the borders protected by the CBAM.

In the absence of CBAMs, if stringent regulations on carbon emissions are imposed in one country, industries just relocate their operations to another. While our green country may celebrate the reduction in domestic emissions, the overall global emissions haven’t changed, but have just been shuffled around. And often, the green country ends up reimporting the goods anyway. Welcome to the problem of carbon leakage. Of course, international cooperation can reduce this, but there will always be someone willing to accept polluting industries along with the local jobs and tax revenues they bring. CBAMs address this issue from both ends.

With CBAM in place, companies that have invested heavily in greener technologies won’t be disadvantaged by those who continue using cheaper but more polluting processes. The competitive incentive to shift production is removed.

But unlike conventional tariffs or trade barriers, CBAM isn’t about protectionism. Instead, it creates global incentives for adopting cleaner technologies and reducing carbon emissions. As a country with less stringent carbon policies, why allow another state to collect taxes on your exports under a CBAM when you can collect them yourself? Even if such a country doesn’t spend those tax revenues on green infrastructure (which would of course be ideal) they’ve nonetheless tackled one of the biggest issues of climate change which is to ensure that the social cost of carbon (the ‘externality’) is imposed on the emitter (i.e. its ‘internalised’).

This mechanism nudges countries towards implementing greener policies without resorting to punitive measures or hindering international trade.

Even better if revenues from carbon taxes are funnelled back into investments in clean energy infrastructure and technology development within the implementing country. And actually, why not implement a CBAM too to protect against carbon leakage… you can see where this virtuous circle ends up!

Carbon Border Adjustment Mechanisms demonstrate great potential as innovative instruments for fighting climate change on a global scale. They foster fair competition among industries and incentivise nations worldwide to join hands in pursuing cleaner production methods.