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EU Carbon Border Adjustment Mechanism

As the EU strengthens its climate policies, there is growing concern about carbon leakage – when companies relocate carbon-intensive production to countries with looser climate regulations, or when EU products are displaced by more polluting imports. To address this, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), a tool designed to ensure imported goods face a carbon cost equivalent to that of EU-produced goods, supporting global climate goals and fair competition.

What Is The Carbon Border Adjustment Mechanism (CBAM)?

Climate change is a global problem that needs global solutions. As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage’. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is our landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.

By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules.

Latest Developments

On 13 December 2022, the Council and the European Parliament reached a political agreement on the implementation of the new CBAM.

What Will CBAM Apply To And When

The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors. Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.

The gradual phasing in of CBAM over time will allow for a careful, predictable and proportionate transition for EU and non-EU businesses, as well as for public authorities. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime. The objective of this transition period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.

Once the permanent system enters into force on 1 January 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026-2034.

A review of the CBAM’s functioning during its transitional phase will be concluded before the entry into force of the definitive system. At the same time, the product scope will be reviewed to assess the feasibility of including other goods produced in sectors covered by the EU ETS in the scope of the CBAM mechanism, such as certain downstream products and those identified as suitable candidates during negotiations. The report will include a timetable setting out their inclusion by 2030.

Next Steps

The European Parliament and the Council will now have to formally adopt the new Regulation. Once formally adopted by the co-legislators, the final set of rules and methodology for applying the CBAM will be further specified in an implementing act to be adopted by the CBAM Committee, made up of experts from EU Member States. The CBAM will then enter into force on 1 October 2023 in its transitional phase.

Key Takeaways

CBAM ensures that carbon-intensive goods imported into the EU, such as cement, steel, aluminium, and fertilizers, carry a carbon price equivalent to that of EU-made goods, preventing carbon leakage and promoting global environmental accountability.
The CBAM began its transitional phase on 1 October 2023, requiring importers to report greenhouse gas emissions without financial obligations. By 2026, a permanent system will be in place requiring the purchase of CBAM certificates based on emissions.
CBAM will phase in alongside the reduction of free allowances under the EU Emissions Trading System (ETS), and may expand to cover more goods by 2030, with reviews during the transitional period to refine its methodology and scope.