Background: CBAM as part of the European Green Deal
When the European Commission (the Commission) unveiled an ambitious climate policy aimed at reaching carbon neutrality by 2050 – the so-called ‘European Green Deal’– on 11 December 2019, the Commission’s package of proposed measures included the introduction of a Carbon Border Adjustment Mechanism (CBAM). The Commission explained that the CBAM would apply to selected sectors to reduce the risk of carbon leakage if other countries do not share the same climate ambition as the EU.
On 14 July 2021, the Commission finally presented its CBAM proposal, together with a package of other legislative proposals aimed at reducing the EU greenhouse gas (GHG) emissions, including the revision of the EU Emission Trading System (EU ETS) to include maritime and road transport, and buildings. See our previous alert.
1. The EU CBAM is a tax in all but name
The CBAM is essentially a measure to ensure that imported goods pay a price for their carbon emissions that is comparable to the price paid by EU domestic producers under the EU ETS. In other words, EU importers must pay for carbon at prices reflecting those under the EU ETS to place CBAM-targeted goods on the EU market. The payment is made through an obligation to purchase CBAM certificates upon importation, as explained below.
Strictly and legally speaking, the CBAM is not a customs duty or import tax. This was done deliberately and carefully by the Commission because a tax would require unanimity by all EU member states whereas a duty would make it more difficult to comply with World Trade Organization rules. However, in essence, the CBAM qualifies as a new ‘own resource’ of the EU levied on goods crossing the EU’s external border, thus, being very similar to a duty or import tax, the need to pay for CBAM certificates is triggered by releasing imported goods into the EU’s customs territory. Exceptions will apply, but these will be subject to a strict and complex administrative process imposed on importers.