In October, the transitional period of the Carbon Limit Adjustment Mechanism (for greenhouse gas emissions) of the European Union (EU) began.

The mechanism, known as CBAM by its acronym in English, will initially apply to a group of sectors: steel and iron, aluminum, cement, fertilizers, electricity and hydrogen. These sectors were selected taking into account their high level of carbon intensity and volume of imports into the EU. The scope may be extended over time to other sectors covered by the EU Emissions Trading System (ETS) and considered to be at risk of carbon leakage.

From January 1, 2026, this financial correction will begin to be paid for the import of these products from countries outside the EU. The adjustment will be phased in as free ETS emissions for these products are phased out over a period of eight years. Although indirect emissions (such as the generation of electricity used in manufacturing) will not be considered initially, once introduced they will cause more significant impacts (especially for fertilizers, cement and aluminium).

The impact on Ecuador and other Latin American countries will be relatively limited (at least until the scope of application is extended to other products), given that they do not export significant quantities of these products to the EU. The most affected countries in the region will be Brazil (main product is iron and steel; 0.8% of total exports), Dominican Republic (iron and steel; 1.4% of exports) and Trinidad and Tobago (fertilizers; 6.3% of exports) .

Among developing countries, Mozambique will be most affected. In addition to affecting 22% of exports and 7% of GDP, it would also affect 2% of employees and 6% of the wage bill (more due to aluminum exports).

Some countries, notably the BRICS group, have indicated they will support efforts by China and others to try to engage the World Trade Organization (WTO) on the issue. The BASIC (BRICS without Russia) group within the UNFCCC criticized the measure as “green trade protectionism” and for being inconsistent with the UNFCCC principle of “common but differentiated responsibilities and appropriate capabilities”.

The EU’s response is that CBAM does not impede international trade and is in line with WTO rules. It is said to be a climate-focused environmental policy tool and will be applied in a non-discriminatory and impartial manner (they claim that, on the contrary, it removes discrimination against its own producers).

Some developing countries are promoting carbon taxes or emissions trading systems. This would allow these countries to keep part of the generated income, instead of paying the EU a fee for the CBAM adjustment (only the difference between the carbon price in the EU and in the exporting country will be paid). To date, Argentina, Colombia, Chile, Uruguay and Mexico have adopted carbon taxes, although generally at lower rates than in Europe. In Ecuador, we have the opposite of a carbon tax, since we have subsidies for fossil fuels, and they should be abolished.

Some efforts were made to link CBAM revenues to the provision of funds to affected developing countries, but in the end the funds were not allocated. However, the EU has committed to increasing climate finance, as well as facilitating technology transfer and capacity building to promote the adoption of green technologies and energy. (OR)