The European Commission has announced a set of measures to enable the trade bloc to reach its target of reducing greenhouse gas emissions by 55% it has set for 2030.
In the package we have confirmation of the proposed Carbon Border Adjustment Mechanism (“CBAM”), details of which were disclosed in May.
The scheme is largely as set out in the disclosed documents, with one important exception regarding the transitional provisions.
CBAM will start in 2023 and will apply to the import of electricity and certain goods into the EU Customs Union. The affected goods are aluminum, cement, fertilizers, iron and steel. It is tempting to think that the CBAM will only apply to construction and heavy industry, but the inclusion of aluminum means that it will also apply, for example, to supermarkets that use carbon paper. aluminum and brewers who use aluminum for cans.
When CBAM is fully implemented in 2026, importers, duly authorized to import such goods by the CBAM Authority, will be required to return the imported goods and emissions embedded in the goods. The integrated issues will determine the number of CBAM certificates that the importer must submit. CBAM certificates can be purchased by the importer and will be priced according to the average weekly closing price of carbon under the EU Emissions Trading System. The regulations provide for offsetting any carbon price incurred on emissions related to the production of goods in the country of origin in order to determine the number of CBAM certificates required.
When fully implemented, the system is based on the actual emissions incorporated into the goods to be imported, when these emissions have been calculated and verified by a duly authorized verifier. In the absence of sufficient information and verification, the default emissions for each type of good can be used, based on the 10% worst emitters in the EU that produce similar goods.
During the initial three-year period of the regime, the transition period from 2023 to 2025, the importer will be required to disclose the emissions embedded in the goods but, contrary to the provision in the disclosed documents, there is no will have no payment to be made under the CBAM.
Clearly, the program will create complexities for business supply chains and impose additional costs both in administration and in the underlying carbon price.
The leaked CBAM proposals have sparked international comment, including accusations that the EU is introducing some form of protectionism. There will likely be many more comments now that the proposed framework for CBAM has been released. The United States responded to the leaked documents by saying it wanted to look at the proposals and determine what their response should be and did not rule out retaliatory action.
Developing countries that have significant exports to the EU are concerned about the effect the CBAM will have on their competitiveness and will at a minimum try to ensure that the revenues the EU derives from the measure are used to help. these countries to decarbonise. In the absence of this kind of support from the EU, many countries will need to consider their own emissions trading system or carbon tax so that at least they receive the benefits of the carbon price linked to the goods that they are trading. ‘they produce, rather than having the levy simply paid to the EU.