EU Carbon Border Adjustment Mechanism

In December 2022, the European Parliament and Council agreed on the text of the regulation on the Carbon Border Adjustment Mechanism (the “CBAM”) which is expected to be published in the Official Journal of the EU and enter into force soon.

The CBAM aims to prevent carbon leakage which results when EU companies move production in carbon-intensive sectors to non-EU countries whose environmental policies are less strict than those of the EU.

The CBAM will impose a carbon price on certain products that are imported in the EU. This will be based on the price payable under the EU Emissions Trading System (ETS) when the goods are produced in the EU (the ETS requires companies to pay for a European Emission Allowance for every tonne of carbon they emit).

The CBAM will initially apply to cement, iron and steel, aluminium, fertilisers, electricity and hydrogen, which have a high risk of carbon leakage and high emissions. Its scope will eventually increase.

During a transitional period beginning on 1 October 2023, the CBAM will apply as a reporting obligation only – EU importers will need to report on the greenhouse gas emissions (both direct and indirect) of their imported goods.

Subsequently, the full implementation of the CBAM, starting in January 2026, will require importers to declare every year the quantity of goods they import in the EU and their embedded greenhouse gas emissions and to pay the carbon levy. This will be paid by purchasing CBAM certificates.

At the same time, free emission allowances under the ETS in sectors covered by the CBAM will be gradually phased-out.

National authorities will authorise registration of CBAM declarants, review declarations and sell and re-purchase CBAM certificates.

Where a price for the carbon has been paid in the place where the goods are produced, the EU importer would be exempted from payment under the CBAM.

With the CBAM establishing an equivalent price for carbon between goods produced in the EU and imports, the EU does not only promote its domestic “green” agenda but also pushes other countries to introduce similar “green” policies so that climate change is addressed on a global scale.

This is particularly important given that the biggest polluters are outside the EU.

While this fact certainly makes the net zero target on a global scale ambitious, we can certainly hope that Europe is on the right track towards its goal to reduce greenhouse gas emissions by at least 55% (compared to 1990 levels) by the end of the decade.

This update is for information purposes only and is not intended to constitute legal advice.