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EU agrees details of carbon border adjustment mechanism (CBAM)

© Shutterstock / areporterEuropean union flags on in front of the EU Parliament.

MEPs reached a provisional agreement with the European Council on the basic outline of its tariff plan for carbon intensive industries. The hope is that the carbon border adjustment mechanism (CBAM) will address the problem of carbon leakage and raise global climate ambition.

  • The initial CBAM approach was to cover imports of aluminium, iron, steel, electricity, cement, and some fertilisers. It has been extended to hydrogen, certain precursors, indirect emissions and some downstream products.
  • CBAM rules to apply from 1 October 2023 with a transition period and the new rules are said to be in full compliance with World Trade Organisation rules.
  • The CBAM is intended to prevent carbon leakage, and may be extended further in the future, perhaps to cover plastics made from fossil fuels. 

Rapporteur Mohammed Chahim (S&D, NL), said: “CBAM will be a crucial pillar of European climate policies. It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry. On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the polluter pays principle to our own industry. A win-win situation.”The agreement in the Council takes the CBAM one step closer to implementation but there are concerns about the implications of such a mechanism and how it will work on the ground.

How will the CBAM work?

According to the deal reached, an EU Carbon Border Adjustment Mechanism (CBAM) will be set up to equalise the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods.

This will be achieved by obliging companies that import into the EU to purchase so-called CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.

The law  is expected to incentivise non-EU countries to increase their climate ambition. Only countries with the same climate ambition as the EU will be able to export to the EU without buying CBAM certificates. The new rules will therefore ensure that EU and global climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.

The new bill will be the first of its kind. It is designed to be in full compliance with World Trade Organisation (WTO) rules. It will apply from 1 October 2023 but with a transition period where the obligations of the importer shall be limited to reporting.

To avoid double protection of EU industries, the length of the transition period and the full phase in of the CBAM will be linked to the phasing out of the free allowances under the ETS. This will be negotiated later this week in connection with the revision of the ETS and the results integrated into the CBAM regulation.

What will the CBAM cover?

CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as proposed by the Commission, and extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as to some downstream products such as screws and bolts and similar articles of iron or steel.

Before the end of the transition period, the Commission will assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal to include all goods covered by the ETS by 2030. They also plan to assess the methodology for indirect emissions and the possibility to include more downstream products.

The governance of CBAM will be now more centralised, with the Commission in charge of most of the tasks. By the end of 2027, the Commission will do a complete review of CBAM including an assessment of progress made in international negotiations on climate change, as well as the impact on imports from developing countries, in particular the least developed countries (LDCs).

Next steps to implementation

This partial deal is dependent on an agreement on the reform of the EU Emissions Trading System. Parliament and Council will have to formally approve the agreement before the new law can come into force. The new law will come into force 20 days after its publication in the EU Official Journal.

The CBAM itself is part of the “Fit for 55 in 2030 package”, which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.

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