The European Union (EU) has inaugurated the transitional phase of the world’s first Carbon Border Adjustment Mechanism (CBAM) as of October 1, 2023, marking a crucial milestone in the global fight against climate change. The CBAM stands as one of the central pillars of the EU’s comprehensive Fit for 55 Agenda and is developed as a tool to prevent carbon leakage.
Overview of CBAM
- CBAM starts its initial phase on 1 October 2023.
- It first applies to specific high-carbon imports like cement, steel, aluminium, fertilisers, electricity, and hydrogen to prevent carbon leakage.
- When fully operational, it will regulate over 50% of emissions in sectors covered by the Emission Trading System (ETS).
- The initial phase is a learning period, allowing stakeholders to refine emissions methodology and report greenhouse gas emissions without making financial adjustments.
- Several sectors will include indirect emissions after the transitional period, using a set methodology from the Implementing Regulation, published on 17 August 2023.
- Importers have multiple reporting options until 1 January 2025, after which only the EU method is permissible.
- The Commission will provide tools and guidance to assist importers in reporting.
- Importers’ first reports, covering the last quarter of 2023, are due by January 2024.
- The full CBAM system begins on 1 January 2026; importers will declare yearly imports and their emissions, acquiring corresponding CBAM certificates, whose prices are linked to EU ETS allowances.
- Concurrently, from 2026-2034, free allocation under EU ETS will be phased out as CBAM is phased in.
- CBAM’s functionality and scope will be reviewed during its initial phase, potentially including more goods under its purview by 2030.
Source: EU Taxation and Customs Union – “Carbon Border Adjustment Mechanism”
Objective and Scope:
The objective of CBAM is to equalise the price of carbon between domestic products and imports to ensure that the EU’s climate policies are not undermined by production relocating to countries with less ambitious environmental standards or by the influx of more carbon-intensive imports. In this transitional phase, CBAM applies to imports of specific commodities, namely cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
“The EU needs the Carbon Border Adjustment Mechanism to achieve its ambitious emission reduction targets and achieve climate neutrality by 2050. The CBAM will tackle the risk of carbon leakage in a non-discriminatory way and in full compliance with WTO rules. The EU will be leading by example and encouraging global industry to embrace greener and more sustainable technologies. On a practical level, the CBAM will contribute to the wider discussion about greater use of carbon pricing globally: another good way to fight climate change,” said Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People.
Transitional Phase Insights:
The transitional phase, spanning until 2026, serves as a learning period for stakeholders, including importers, producers, and authorities. It will allow the EU importers of designated goods to acclimate to the new system, wherein they are mandated to report on the volume of their imports and the greenhouse gas (GHG) emissions associated with their production. However, any financial adjustments or payments based on emissions are not required during this period. The first report, covering data for the fourth quarter of 2023, is due by January 31, 2024.
The European Commission will use this phase to garner crucial information on embedded emissions, refining the methodology for the definitive phase starting in 2026. Post-2026, importers will be required to purchase and surrender “CBAM certificates” corresponding to the GHGs embedded in the imported CBAM goods.
Supportive Measures and Review Mechanisms:
To facilitate the implementation, the European Commission is launching a new CBAM transitional registry and providing detailed written guidance, training materials, webinars, sector-specific factsheets, and checklists to support businesses. Regular reviews of the CBAM’s functioning and product scope during the transitional phase will be conducted before the definitive period.
Global Implications and Compliance:
The CBAM is deemed to be a WTO-compatible measure, designed to encourage industries worldwide to adopt more sustainable and greener technologies. It is positioned not as a means of trade protection but as a mechanism to protect the EU’s climate ambition and avert carbon leakage to countries with lower environmental standards. Executive Vice-President Valdis Dombrovskis highlighted the role of CBAM in achieving the EU’s emission reduction targets and its contribution to the wider dialogue about the utilization of global carbon pricing as a mechanism to combat climate change.
According to European Economy Commissioner Paolo Gentiloni, “CBAM is not about trade protection. It is about protecting the EU’s climate ambition – and seeking to raise the level of climate ambition worldwide.”
Conclusion:
The initiation of the transitional phase of CBAM by the EU is a significant step in globally harmonizing carbon pricing and incentivizing the adoption of greener technologies. It reflects the EU’s pioneering stance on carbon pricing and its commitment to achieving climate neutrality by 2050. While the measure might induce discussions among trading partners, it exemplifies the EU’s strategic approach to enhancing global climate ambition and mitigating the risks of carbon leakage in alignment with international trade norms.