Last week, the European Parliament (EP) and the Council reached a provisional agreement on the Carbon Border Adjustment Mechanism (CBAM) on 13 December, and later on 17 December on the revision of the EU Emission Trading System (ETS). These agreements represent an important milestone in the extension of the EU carbon market and the implementation of the EU Fit for 55 Package.
Agreement on CBAM :
CBAM is a mechanism which will set a price on the carbon emissions embedded in products imported within the EU. It replicates the EU ETS system which concerns certain products produced in the EU such as pavers, roof tiles, lime, paper pulp and ammonia for instance. The scope of CBAM will include cement, iron and steel, aluminium, fertilisers and electricity. Furthermore the EU lawmakers decided to integrate hydrogen and indirect emissions, as well as certain precursors and downstream products (such as bolts and screws). Therefore, importers of hydrogen will now need to cover with CBAM certificates the direct and indirect emissions linked to the production process of the imported products. The price of CBAM certificates follows (on a weekly average) the ETS allowance price, currently at 88€ per tonnes of CO2 emissions.
The CBAM is expected to apply as from 1 October 2023 but with a transition period for importers to adapt to the reporting requirements until 2026, in line with the EU ETS free allocation phase out. Thus, EU importers will have to comply at first to the reporting requirements under CBAM until 2026 and as from this date, importers will have to submit their CBAM certificates as from this date and face the financial impact.
During the EU ETS discussions between the EP and the Council, it has been agreed that the free allowances for the CBAM sectors will phase-out over a nine year period (from 2026 until 2034). In other words, CBAM will follow the EU ETS allowances phase out rate to cover all emissions embedded in the production process of the covered sectors in 2034.
Extension EU ETS :
The EU ETS provisional agreement increases the overall emissions reduction target for the sector covered by the ETS to 62% by 2030. The linear reduction factor will also be increased to support this objective. The Market Stability Reserve mechanism (MSR) will be lengthened beyond 2023 with an annual intake rate of 24% of allowances to ensure coherence in this regard as well. Regarding the free allowances phase-out, the co-legislators opted for a slow reduction rate until 2029 and at an accelerated pace as from 2030 until 2034, which marks the total phase-out of free allowances.
The increased reduction of overall emissions, together with the phase-out of allowances, means that highly emitting producers in the ETS scope will face higher costs in the near future.
Moreover, the EP and the Council agreed to include the maritime shipping sector in the EU ETS scope, as from 2024 with a gradual phase-in until 2026. However, not all vessels will be included in 2024, different timing will apply for offshore vessels of over 5000 GT and general cargo vessels (between 4000-5000 GT).
The co-legislators adopted the creation of a separate ETS II specifically for fuel for road transports and buildings by 2027, thus one year later than first proposed by the Commission.
Next steps :
The EP and the Council need to formally approve the agreement before the new law comes into force. This will then take effect 20 days after its publication in the EU Official Journal. If you have any questions regarding the new carbon market developments, do not hesitate to contact our team.