Carbon Border Adjustment Mechanism (CBAM) – Briefing
Emission-free and fair competition in the EU single market?
With the Regulation (EU) 2023/195 having entered into force on 10 May 2023, the transition period of the Carbon Border Adjustment Mechanism (CBAM) allowance implementation has begun 1 October 2023.
Being part of the “Fit for 55” package of the European Green Deal, the new approach complementing the European Emission Trading System shall help to meet the ambitious policy on climate change actions regarding decarbonisation. Once fully implemented, it is to cover more than 50% of the emissions of the sectors covered by the EU Emissions Trading Scheme (EU ETS). Both systems work by pricing CO2 emissions.
The implementation of the CBAM is divided into two transition periods with different obligations. Having introduced reporting requirements from 1 October 2023, the transition period will lead to the full implementation of the system on 1 January 2026. Companies of the affected branches will then be obliged to acquire the amount of CBAM certificates that corresponds to the amount of CO2 released during the production of the imported goods. The division into two different periods intends to secure a predictable and proportionate transition for the affected branches. During the transition period, the Commission will establish a precise differentiation of sectors and products covered by the CBAM.
Aim of the CBAM
CBAM is not intended to replace the EU-ETS. Instead, it serves as an extension of the EU-ETS to incentivise the sustainability of imported goods and in this way create a level playing field with respect to those produced within the single market. Aiming for the reduction and elimination of carbon leakage, the system will likely help to promote cleaner industrial production in non-EU member states. Furthermore, the Commission seeks to obviate the abscondence of production chains to states without (complete) pricing of CO2 emissions until today.
The mechanism will replace the free EU-ETS allowances that have been supplied to avoid carbon leakage. While the end of the phase-out of the free EU-ETS allowances for products covered by CBAM is determined to be 2034, the phase-in period of the CBAM certificates begins on 1 January 2026 and will continue until 2034. The phase-in period of the CBAM certificates and the phase-out period of the free EU-ETS allowance occur within similar speed and time to avoid an undue advantage of EU industries compared to foreign industries, thus respecting WTO rules.
In opposition to the EU-ETS, the CBAM is no cap-and-trade system. In consequence, there is no maximum amount of CBAM certificates available to CBAM declarants and no auction of certificates among CBAM declarants. However, the price of CBAM certificates will be in line with the price of EU-ETS allowances. Furthermore, there is no opportunity to trade with already acquired and registered CBAM certificates between companies. In the event of a surplus of purchased certificates, the member states shall repurchase the excess of certificates. We will explain the repurchase progress in more detail in a following article.
In general, with the Commission being responsible for the implementation of the CBAM and holding numerous delegated legislation competences, governance, and organization of the CBAM will be more centralized compared to the EU-ETS.
Scope of Application of CBAM
The CBAM only applies if the imported product originates in a third state. Excluded from the scope of application are the territories of the European Free Trade Association.
The CBAM will concern branches whose production is emission intensive and at significant risk of carbon leakage. It applies to certain goods such as cement, iron and steel, aluminium, fertilisers, hydrogen, electricity including certain selected precursors as well as certain downstream products such as screws and bolts and similar articles of iron and steel.
Due to the technical uncertainty to measure the emissions, the Regulation specifically excludes the application on organic bulk chemicals and refinery products. However, the scope is likely to be extended to these products (and others) perspectively. This is why, one year before the end of the transition period, the Commission will submit a report to the European Parliament and the Council and propose an extension of the scope of CBAM to certain goods and products. As a further development of these proposals, the CBAM will likely cover certain downstream products and products whose emissions cannot be adequately determined at present. The criteria for the selection process are:
- the relevance of a sector in terms of emissions,
- whether the sector in question is one of the largest overall emitters,
- the existence of a significant risk of carbon leakage
- as well as the necessary balance between the coverage of a wide range of goods in terms of greenhouse gas emissions on the one hand and limiting the complexity and administrative burden on the other.
Challenges for Importers
The implementation of CBAM will entail certain challenges for importing companies:
- The complex administrative and legal requirements, such as documenting and calculating imports and emissions to obtain the appropriate number of certificates, will cause a significant bureaucratical burden.
- Especially for smaller companies there might a financial and administrative burden, as the CBAM obligations apply to companies in the above sectors regardless of their size and frequency of imports.
- The Commission's extensive powers to adopt implementing legislation concerning the management, extension, and specification of legal obligations. entails legal uncertainty and entrepreneurial risk.
Our EU/COMP team will be happy to advise you on all questions related to reporting obligations and the acquisition of CBAM certificates.
We would like to thank Lea Zymelka for her valuable support in the creation of this article.