How to navigate the EU’s CBAM trilemma: A review of policy objectives and possible designs

This article focuses on the trilemma faced by EU policymakers in balancing the three conflicting policy objectives of the EU's Carbon Border Adjustment Mechanism (CBAM). The first objective is to create a level playing field between EU and non-EU producers by setting a uniform carbon price across borders. The second objective is to uphold climate justice. The third objective is to encourage third countries to adopt their own carbon pricing measures thus extending the scope of a de facto climate club. The article reviews the three main approaches to navigating the CBAM trilemma and examines the resulting trade-offs between policy objectives. The first approach is the dual-track policy design favoured by EU institutions, in which any climate justice issues raised by the CBAM pass to the remit of foreign climate aid. The second approach involves setting differentiated CBAM prices for third countries, depending on their level of development, or granting some of them full exemptions from the policy. The third approach is to recycle CBAM revenues back to certain trading partners, particularly low- and lower-middle-income countries.