The European Parliament and the Council of Europe reached yesterday a political agreement on the Carbon Border Adjustment Mechanism (CBAM).
The CBAM is the EU’s landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. The recent agreement will be complemented by the revision of the Emissions Trading System (ETS), with negotiations taking place later this week, and that will align the phase-out of the allocation of free allowances with the introduction of CBAM to support the decarbonisation of EU industry.
Climate change is a global problem that needs global solutions. As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage’. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.
By making sure that a price is paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will make sure the carbon price of imports is equivalent to the carbon price of domestic production, thereby ensuring that the EU’s climate objectives are not undermined. The CBAM is designed in such a way that it is compatible with WTO-rules.
“The Carbon Border Adjustment Mechanism is a central part of our European Green Deal, preventing the risk of carbon leakage. It is a huge step forward, as we raise our climate ambitions.”President von der Leyen
The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% the emissions of the ETS covered sectors. Under this political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.
The gradual phasing in of CBAM over time will allow for a careful, predictable and proportionate transition for EU and non-EU businesses, as well as for public authorities. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct emissions), without making any financial payments or adjustments. The agreement foresees that indirect emissions will be covered in the scope after the transitional period, on the basis of a methodology to be defined in the meantime.
Once the permanent system enters into force, according to a schedule to be defined in the revised EU ETS rules currently under negotiation, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted.
A review of the CBAM’s functioning during its transitional phase will be concluded before the entry into force of the definitive system. At the same time, the product scope will be reviewed to assess the feasibility of including other goods produced in sectors covered by the EU ETS in the scope of the CBAM mechanism, such as certain downstream products and those identified as suitable candidates during negotiations. The report will include a timetable setting out their inclusion by 2030.
Given the close links between the new CBAM and the review of the EU ETS, currently under negotiation in ‘trilogue’ between the co-legislators, the final technical details of the mechanism’s functioning will need to be clarified. Once the text has been finalised, the European Parliament and the Council will have to formally adopt the new Regulation before it can enter into force.
Source: EU – Carbon Border Adjustment Mechanism