EU Council and Parliament Reach a Provisional Agreement on Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism(CBAM) is a fundamental part of the “Fit for 55” package. This initiative aims to reduce net greenhouse gas emissions by 55% by 2030 (as compared to emissions in 1990) and to become a climate-neutral continent by 2050. The proposal for a carbon border adjustment mechanism was presented in July 2021. On 13 December 2022, the Council of the European Union and the European Parliament reached a provisional political agreement on CBAM after the parties failed to reach an agreement in summer 2022.

Background

CBAM stipulates the implementation of a border adjustment system for specific carbon-intensive products in order to prevent an offshoring of the production to third countries (so called carbon leakage) due to the European Union’s ambitious climate goals and policies. Specifically, the aim is that goods imported into the EU should be covered by carbon pricing equivalent to that applicable to production of the same goods within the EU under the EU Emissions Trading System (EU-ETS).[1] The mechanism is to ensure that European producers are competing within a fair system.

Implementation

The border adjustment mechanism is to be introduced gradually, parallel to the phasing out of free allowances for the European emissions trade. Free EU-ETS allowances will be gradually phased out, from 2.5% in 2026 to a total elimination in 2034.

CBAM will initially only cover goods at a particularly high risk of carbon leakage. Besides cement, iron, steel and aluminium, these also include fertilisers, electricity and hydrogen. Under certain circumstances, indirect emissions and certain precursors as well as downstream products like bolts and nuts and similar goods made from iron or steel are covered as well. Furthermore, before the end of the transition period the Commission will assess whether the scope of application is to be extended to other goods like organic chemicals or polymers.

Initially, only reporting obligations shall apply for the import of the named goods starting in October 2023 for the transition period expected to last until the end of 2025. From 2026 onwards, charges are to be imposed on certain products which emit CO2 in production in non-EU countries. CBAM shall ensure the carbon price of imports is equivalent to the carbon price of domestic production in order to keep European products competitive within the European market.

Outlook

The agreement reached on CBAM is dependent on an agreement on the reform of the EU Emissions Trading System. Furthermore, the EU Parliament and Council will have to formally approve the agreement before the new law can come into force.

Authors: Christiane Zöhrer, Margarete Kinz

[1] EU-ETS was introduced in 2005 as a means for implementing the Kyoto Protocol on climate change and is the principal European climate protection instrument. EU-ETS is a trading system for greenhouse gas emissions allowances and caps the amount of greenhouse gases that may be emitted by energy-intensive industries, power plants and the aviation sector. The EU sets the cap on the number of emission allowances, the number being reduced continuously with the aim of it reaching zero by 2050.