Ever since the Paris Agreement was adopted in 2015, the European Union (EU) has taken significant steps to combat climate change and meet its ambitious climate targets. As part of its “Fit for 55” legislative package, the EU recently introduced the Carbon Border Adjustment Mechanism (CBAM) with the aim of curbing carbon leakage and the reduction of greenhouse gas emissions from certain imported goods. In this article, we will explore the key features and objectives of the CBAM, as well as its significance in the context of the EU’s climate goals.
The CBAM is firmly rooted in the EU’s commitment to the Paris Agreement and the European Green Deal. These agreements set ambitious targets to reduce greenhouse gas emissions and limit global warming to well below 2°C, with an aspirational goal of 1.5°C. The CBAM aligns with the EU’s aim to reduce emissions by at least 55% compared to 1990 levels by 2030 and achieve climate neutrality by 2050. The CBAM is also expected to create a ripple effect and contribute to promoting decarbonization in third countries.
The CBAM in a Nutshell
The CBAM is a regulatory tool designed to address the risk of carbon leakage, which occurs when businesses move production to countries with less stringent climate policies, resulting in higher global emissions. The regulation currently focuses on specific goods most vulnerable to this risk, including cement, iron & steel, aluminum, fertilizer, hydrogen, and electricity.
Key Phases of the CBAM
The CBAM is being rolled out in two distinct phases:
- Transitional Phase (Starting October 2023):
- The CBAM was set in motion on 1 October 2023.
- Importers of products to the EU would be required to provide quarterly reporting on GHG emissions embedded into the imported products.
- Reporting should be provided within 30 days from the end of the quarter.
- Full Implementation (Starting 2026):
- EU importers of CBAM-covered goods will need to purchase CBAM certificates.
- Certificate prices will be determined based on the weekly average auction price of EU ETS allowances in euros per tonne of CO2 emitted.
- Importers must declare the quantity of goods and their embedded emissions by 31 May each year, surrendering an equivalent number of CBAM certificates.
- Reporting will occur on a quarterly basis as in the transitional phase.
- Importers can deduct carbon pricing already paid during the goods’ production based on verified information from third-country producers. The verification process is overseen by accredited entities.
The EU ETS Connection
The CBAM shares a common objective with the EU ETS, which is to price greenhouse gas emissions. While the EU ETS sets caps on domestic emissions and allows trading of resulting allowances, the CBAM focuses on regulating imports without quantitative limits. Also, the CBAM emphasizes the emissions related to products and not installations, unlike the ETS.
The CBAM aims to ensure equivalent carbon pricing for imports and domestic products, thereby reducing the risk of carbon leakage and not violating existing trade agreements. The CBAM is intended to fully replace the EU ETS by 2030. Customs authorities are responsible for enforcing the CBAM and ensuring compliance.
Gases and Emissions Included
The CBAM covers specific greenhouse gases – carbon dioxide (CO2), nitrous oxide, and perfluorocarbons – either in isolation or in combination depending on the sector category. It applies to both direct and indirect emissions, with indirect emissions referring to emissions from electricity generation used in production. However, indirect emissions are currently undergoing definition and will, therefore, not be included initially.
Sector Selection
The CBAM’s sector selection is based on several criteria, including emissions levels and the risk of carbon leakage. Sectors like iron and steel, aluminum, cement, hydrogen, and fertilizers are included, while organic chemicals and certain refinery products are currently excluded due to technical limitations.
The CBAM also extends to imported electricity, recognizing its significant contribution to greenhouse gas emissions.
International Cooperation
The EU aims to engage with third countries affected by the CBAM in a fair and international manner. The establishment of a “Climate Club” seeks to promote global carbon pricing and cooperation among countries with similar climate goals.
The Carbon Border Adjustment Mechanism is a crucial instrument in the EU’s efforts to reduce greenhouse gas emissions. As the EU pushes for more ambitious climate targets, the CBAM plays a crucial role in ensuring that imported goods are subject to carbon pricing equivalent to that of domestic products. It not only safeguards the Union’s climate objectives but also encourages climate action in third countries. By implementing the CBAM, the EU is taking significant steps toward a more sustainable and climate-resilient future.