Earlier today, on April 18th, the European Parliament held its final vote on the Carbon Border Adjustment Mechanism (CBAM). CBAM is one of the elements of the EU Green Deal, the goal of which is to reduce GHG emissions by 55% by 2030. CBAM is aimed at ensuring a level playing field by equalizing the price of carbon paid by EU installations operating under the EU Emissions Trading System (ETS) and imported goods.
CBAM operates by imposing a charge on the embedded carbon emissions of certain imports, which is equal to the charge imposed on domestic goods under the ETS. In this way, CBAM prevents carbon leakage by companies that relocate their production outside the EU to avoid climate regulation costs.
The voted text is the result of the Trilogue negotiations that were held between the EU Parliament and EU Council last December 2022. Following Parliament vote, the last step for CBAM entry into force will be its adoption by the EU Council. The adoption of CBAM defines the steps towards ensuring that non-EU companies and their products pay their share for their carbon emissions when importing their products to the EU Single Market.
What Products and Sectors Fall Under the Scope of CBAM?
CBAM will initially cover a number of specific products in some of the most carbon-intensive sectors: iron and steel, cement, fertilizers, aluminum, electricity and hydrogen, as well as some precursors and a limited number of downstream products. Only indirect emissions from cement and fertilizers will be taken into account.
However, the Regulation states that the Commission will have to establish a timetable for the gradual inclusion by 2030 of all EU ETS covered products, its indirect emissions, and, eventually, the emissions from international transportation.
A Gradual Phasing-in of Reporting and Financial Obligations
CBAM will begin to operate from October 2023 onwards with simplified reporting obligations fundamentally aimed at data collection. Starting January 2026, the full CBAM will kick in with the corresponding financial obligations for companies that will be required to purchase CBAM certificates, which will be priced equivalent to the cost of carbon under the EU ETS.
To ensure compatibility with EU international obligations (1), CBAM financial burden for importers has to mirror the effective carbon price levied on EU ETS installations. Then, CBAM will be phased in gradually, in parallel to the phasing out of the free allowances under EU ETS, over a nine-year period between 2026 and 2034.
CBAM’s Disruptive Effect on Global Industrial Value Chains
CBAM adoption will have significant implications for industrial supply chains. It will not only affect producers of covered goods but also industries downstream and upstream the value chain, such as automotive, construction, and manufacturing sectors. Customers will now be looking for scarce green or recycled steel and green cement, increasing competition for access to low-carbon materials and products, which will drive up their demand. As the cost of carbon-intensive products rises, companies may have to adjust their business models, supply chains, and operations to reduce their carbon footprint.
CBAM is a policy tool that ensures a level playing field for EU carbon-intensive goods within the EU Single Market, and it will be interesting to see how it is implemented in the coming years. The disruption to supply chains and the increased competition for low-carbon materials will be significant, but the benefits of reducing carbon emissions and promoting low-carbon production methods seem to be even greater.
If you want to get more insights in this developing tax regulatory framework and how it will impact your business, please register to our upcoming webinar and/or reach out to Giovanni Gijsels (firstname.lastname@example.org), Alexis De Méyère (email@example.com), Tom Wallyn (firstname.lastname@example.org), Caroline Schmidt (email@example.com) or Lorenzo E. Costa (firstname.lastname@example.org).
(1) An issue of special concern is CBAM compatibility with World Trade Organization (WTOS)’s General Agreement on Tariffs and Trade (GATT).