Carbon Border Adjustment Mechanism (EU)

In March, the European Parliament adopted a resolution on a WTO-compatible carbon border adjustment mechanism (CBAM). WTO rules mean an imported product cannot be subject to tougher measures than products produced domestically. The EU’s March CBAM Resolution is here.

The EU’s CBAM would be part of a broader EU industrial strategy and cover all imports of products and commodities covered by the EU ETS, adding a carbon tax to the import of these products or adding a mechanism mirroring the EU ETS. The preference is for a mechanism mirroring the EU ETS – importers would buy permits for imports of certain goods – with countries of similar carbon price e.g. Norway, Liechtenstein, Iceland, and possibly Switzerland, exempted.

By 2023, and following an impact assessment, the Resolution calls for CBAM to cover the power sector and energy-intensive industrial sectors like cement, steel, aluminium, oil refinery, paper, glass, chemicals and fertilisers.

Specifically in para 10, the Resolution –

10. Reiterates that the introduction of a CBAM should be part of a package of legislative measures to ensure the swift reduction of GHG emissions deriving from EU production and consumption, in particular by scaling up energy efficiency and renewable energies; stresses that the CBAM should be coupled with policies aimed at enabling and promoting investments in low-carbon industrial processes, including through innovative financing tools, the new Circular Economy Action Plan and a broader EU industrial policy that is both environmentally ambitious and socially fair, with a view to steering a decarbonised reindustrialisation of Europe to create quality jobs at a local level and ensure the competitiveness of the European economy, while fulfilling the EU’s climate ambition and offering predictability and certainty to secure investments towards climate neutrality;

And at para 16, the Resolution –

16. Considers that in order to address the potential risk of carbon leakage [competition from countries with lax climate rules] while complying with WTO rules, the CBAM needs to charge the carbon content of imports in a way that mirrors the carbon costs paid by EU producers; stresses that carbon pricing under the CBAM should mirror the dynamic evolution of the price of EU allowances under the EU ETS while ensuring predictability and less volatility in the price of carbon; is of the opinion that importers should buy allowances from a separate pool of allowances to the EU ETS whose carbon price corresponds to that of the day of the transaction in the EU ETS; underlines that the introduction of the CBAM is only one of the measures in the implementation of the European Green Deal objectives and must also be accompanied by the necessary measures in non-ETS sectors as well as an ambitious reform of the EU ETS to ensure it delivers meaningful carbon pricing that fully respects the polluter pays principle, and to contribute to the necessary GHG emissions reduction in line with the EU’s updated 2030 climate target and 2050 net zero GHG emissions target, including by addressing the linear reduction factor, a rebasing of the cap and assessing the potential need for a carbon floor price;

And at para 32, the Resolution –

32. Acknowledges that the CBAM could be implemented either as an extension of the current regime of customs duties or as a complementary scheme within the existing EU ETS framework; emphasises that both approaches could be entirely consistent with an own resources initiative;

The European Commission is expected to present a legislative proposal on a CBAM in July 2021 as part of the European Green Deal.

In early June, the first draft of the EU’s CBAM legislative proposal became public (it ‘leaked’ essentially).

Under the current draft, importation of products covered by the CBAM would be carried out by “authorized declarants” who would lodge “CBAM declarations” annually. These declarations would reflect direct and indirect GHG emissions embedded in the imported products. Regulated entities (importers) would then surrender a corresponding amount of “CBAM certificates.”

The proposal identifies a preference for the declaration of an actual installation-specific value of the specific embedded emissions of an imported good rather than using default values. Each authorized declarant would ensure that the declared embedded emissions are verified by an independent verifier. In the situation where actual GHG emission values could not be verified—for example, as a result of the authorized declarant’s failure to submit the required information—default values would be used to determine the number of CBAM certificates to be surrendered. Default values are proposed to be set at a relatively high level corresponding to the emissions of the 10 percent worst performing sites in the EU for each of the processes involved in the production of goods.

The proposal provides for the possibility of offsetting the cost compliance with the CBAM against a carbon price paid in the country of origin of the imported good. Declarants would apply for compensation—i.e., a reduction in the number of certificates to be required—if a carbon price had already been paid in the country of origin for the embedded emissions in the imported goods.

Further details are in this Mayer Brown explainer – here, which also notes that the actual legislative proposal might be significantly altered.

I will post again when the legislative proposal is issued.

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