Reed Smith LLP

Reed Smith Client Alerts

EU Carbon Border Adjustment Mechanism will be implemented from 1 October 2023

Subscribe
Inicio Perspectivas EU Carbon Border Adjustment Mechanism will be implemented from 1 October 2023
The Carbon Border Adjustment Mechanism (CBAM) is 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 Emission Trading System (EU ETS). On 13 December 2022, the two EU co-legislators, the Council of the EU and the European Parliament, provisionally reached an agreement on the final text of the CBAM Regulation. During a transition period (1 October 2023 – 31 December 2025), EU importers will have to comply with reporting requirements, but will not need to purchase CBAM certificates yet. Once CBAM is fully in place from 2026 onward, EU importers will be obliged to purchase CBAM certificates corresponding to the embedded emissions of imported CBAM goods. Below, we explain key elements of the CBAM Regulation as it has been adopted, and how CBAM will work in practice.

Background

On 14 July 2021, the European Commission presented a legislative proposal on CBAM as part of its flagship Green Deal and “Fit for 55” package focused on climate change and the environment. On 15 March 2022, the Council of the EU (composed of the Member States) agreed on its General Approach with limited changes to the Commission proposal. On 22 June 2022, the European Parliament (consisting of directly elected representatives) adopted its position, which is largely in line with the Commission proposal, except for the longer transition period, the expansion of CBAM products, the faster phase-out of free allowances, and the inclusion of export rebates. On 13 December 2022, the two EU co-legislators, the Council of the EU and the European Parliament, reached an agreement on the final text of the CBAM Regulation.

Key elements of the Council and Parliament agreement

Given that the end of CBAM’s transition period is linked to the phasing out of the free allowances under the EU ETS, CBAM was also discussed at trilogues concerning the EU ETS revision on 16-18 December 2022. The key elements of the agreement on CBAM are as follows:

CBAM goods: CBAM will cover cement, fertilizers, iron and steel, aluminium, and electricity, as initially proposed by the Commission, as well as hydrogen, certain precursors (basic materials that are used as inputs in the production of CBAM goods), and a few downstream products (e.g., screws and bolts). The EU’s ultimate objective is broad product coverage under CBAM. To that end, the Commission will conduct a comprehensive review before the transition period ends with a view to possibly include other industry sectors.

Scope of emissions: CBAM will cover both direct emissions (emissions generated from manufacturing CBAM goods) and indirect emissions (emissions generated from electricity used in manufacturing CBAM goods). This means that EU importers must already report indirect emissions during the transition period (see further below).

Governance: The governance of CBAM will be more centralised. Instead of the competent authorities of EU Member States, as suggested in the Commission proposal, the Commission will be in charge of most of the administrative tasks involved in the running of CBAM.

Transition period: The transition period will start from 1 October 2023 and end when the free allowances under the EU ETS starts to phase out. As free allowances will be phased out from 2026, as explained below, the transition period will end on 31 December 2025. CBAM will fully apply from 1 January 2026.

Free allowances under EU ETS: Free allowances given to CBAM sectors under the EU ETS will start being phased out from 2026 and completely disappear by 2034 according to the following timeframe: 2026: 2.5%, 2027: 5%, 2028: 10%, 2029: 22.5%, 2030: 48.5%, 2031: 61%, 2032: 73.5%, 2033: 86%, 2034: 100%. This is a compromise made by the Commission and the Council (which supported a complete phase-out by 2035) and the Parliament (which advocated a complete phase-out by 2032).

Review clause: Before the transition period ends, the Commission will conduct a comprehensive review and present a report to the Parliament and the Council, examining whether and how to expand CBAM. In particular, the Commission will assess: (i) whether to extend CBAM to other goods at risk of carbon leakage, including organic chemicals, plastics and other downstream goods, with the goal to include all goods covered by the EU ETS by 2030; and (ii) whether to include indirect emissions after the transition period ends and the methodology used to calculate indirect emissions.

Exports: For now, CBAM will only cover imports of CBAM goods into the EU. Although the Parliament suggested that the most efficient EU installations should receive free allocations under the EU ETS for emissions linked to their export of CBAM goods, this was not included in the final text due to concerns about being inconsistent with WTO rules. Such inclusion could be viewed as an export subsidy, which is prohibited under Article 3.1(a) of the WTO Agreement on Subsidies and Countervailing Measures.

Instead, by 2025, the Commission will assess the risk of carbon leakage arising from the export of CBAM goods to non-EU countries and, if needed, present a WTO-compliant legislative proposal to address this risk. In addition, an estimated 47.5 million allowances will be used to raise new and additional financing to address any risk of export-related carbon leakage.