What is the Carbon Border Adjustment Mechanism?
A carbon border adjustment mechanism (CBAM) is a trade policy tool used to ensure that domestic carbon pricing systems are not undermined by imports from countries that do not have comparable climate policies. It is usually implemented as a border-level carbon tax or fee applied to imports from other countries that do not have carbon pricing systems in place.
It will be phased in gradually, starting with certain goods at high risk of carbon leakage such as iron and steel, cement, fertilizer, aluminium, and electricity generation. A reporting system will apply as from 2023, and importers will start paying a financial adjustment in 2026, with the revenues contributing to the EU's budget.
Which sectors will the new mechanism cover and why were they chosen?
The CBAM will initially apply to imports of:
• iron and steel,
which have a high risk of carbon leakage and high carbon emissions, taking into consideration the administrative feasibility of covering these sectors from the start.
The CBAM will cover direct emissions of greenhouse gases emitted during the production process of these products, and by the end of the transition period, the Commission will assess the effectiveness of the CBAM and consider whether to extend its scope to more products and services - including down the value chain, and whether to cover indirect emissions.
Why is the Commission proposing a Carbon Border Adjustment Mechanism?
The EU is leading international efforts to combat climate change, with its European Green Deal aiming to reduce emissions by 55% compared to 1990 levels by 2030 and become a climate-neutral continent by 2050. To achieve this, the July 2021 package includes the Carbon Border Adjustment Mechanism (CBAM), a climate measure designed to prevent the risk of carbon leakage and maintain WTO compatibility. The CBAM will equalize the price of carbon between domestic products and imports to ensure that the EU's climate objectives are not undermined by production relocating to countries with less ambitious policies.
How will the CBAM work in practice?
The CBAM will mirror the ETS by having importers purchase certificates based on the weekly average auction price of EU ETS allowances expressed in € / tonne of CO2 emitted. National authorities will authorize registration of declarants, verify declarations, and sell CBAM certificates, while importers must declare quantities of goods and embedded emissions imported into the EU by 31 May each year and surrender purchased CBAM certificates. This will ensure equal treatment for products made in the EU and imports from elsewhere and avoid carbon leakage.
What will happen in the transitional phase?
The transitional phase will apply from 1 October 2023 and finishing at the end of 2025, the Commission's proposal requires importers to report emissions embedded in their goods without paying a financial adjustment, allowing for a careful and proportionate transition for EU and non-EU businesses as well as authorities. Once the definitive system becomes operational in 2026, EU importers must annually declare the quantity of goods and the amount of embedded emissions they imported into the EU and surrender the corresponding amount of CBAM certificates.
Who will fall under the scope of the CBAM?
The CBAM will cover imports of goods from all non-EU countries, excluding those from the European Economic Area, Switzerland, and countries that are in the process of integrating their electricity markets with the EU and have met certain obligations and commitments; any exemptions granted to these countries will be reviewed in 2030.
Where can I learn more?
Get our CBAM GUIDE