In July 2021, the European Commission released its proposal for a Carbon Border Adjustment Mechanism (CBAM) that will function as a carbon tariff on EU imports of steel, iron, cement, aluminum, fertilizers, and electricity. This literature review offers an overview of the proposed CBAM, examines the challenges that such a system faces and discusses how the proposal has tried to address them. The main challenges are administrative complexity, legal concerns, and the risk for negative international. The CBAM addresses these with design choices but there still remains concerns over the exclusion of a rebate, the damages to developing countries and the reaction of trade partners. The paper also explains the policy context by providing an overview of the EU Emissions Trading System (EU ETS) and by discussing how the CBAM addresses carbon leakage and the environmental bias in trade policy.