Carbon Border Adjustment Mechanism (EU )

Agreement was reached on Tuesday on the EU’s Carbon Border Adjustment Mechanism. (CBAM). The agreement needs to be confirmed by ambassadors of the EU member states, and by the European Parliament, and adopted by both institutions before it is final.

This provisional agreement is dependent on some aspects which are relevant for CBAM but need to be spelled out in other pieces of legislation on which negotiations are still ongoing. The Council presidency considers that the CBAM regulation can be formally adopted only once the elements relevant for CBAM are resolved in other related dossiers.

Concerning the products and sectors which fall within the scope of the new rules, CBAM will initially cover a number of specific products in some of the most carbon-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, as well as some precursors and a limited number of downstream products. Indirect emissions would also be included in the regulation.

Under the provisional agreement, CBAM will begin to operate from October 2023 onwards. Initially, a simplified CBAM would apply essentially with reporting obligations only. The aim is to collect data. From then onwards, the full CBAM will kick in. It would be phased in gradually, in parallel to a phasing out of the free allowances, once it begins under the revised EU emissions trading system (ETS) for the sectors concerned.

CBAM addresses greenhouse gas emissions embedded in certain goods listed in Annex I of the proposal, upon their importation into the customs territory of the Union, in order to prevent the risk of carbon leakage.

CBAM targets imports of products in carbon-intensive industries. The objective of CBAM is to prevent the greenhouse gas emissions reduction efforts of the EU being offset by increasing emissions outside its borders through relocation of production to non-EU countries (where policies applied to fight climate change are less ambitious than those of the EU) or increased imports of carbon-intensive products.

CBAM is designed to function in parallel with the EU’s Emissions Trading System (EU ETS), to mirror and complement its functioning on imported goods. It will gradually replace the existing EU mechanisms to address the risk of carbon leakage, in particular the free allocation of EU ETS allowances.

It is essentially a Carbon Border tax. Importers will have to buy permits for their carbon emissions at the same price as domestic producers under the EU’s emissions trading system.

Some issues are still outstanding (set to be discussed over this weekend) . These include energy rebates, and the free greenhouse gas allowances currently received by some EU companies.

CBAM is designed to protect against “carbon leakage” – the risk that EU industries could outsource manufacture of goods for the domestic market to regions with lower environmental standards.

Note: the US has introduced its own Inflation Reduction Act of 2022 – a 700 billion US dollar climate, health and tax bill. Information is here.

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