What is CBAM?
CBAM is a climate measure whose main purpose should be the prevention of the risk of carbon leakage. In other words, it is a tariff on carbon-intensive products and processes that should prevent the increased emission outside the EU through relocation of manufacturing to non-EU countries with less strict environmental policies. The CBAM represents the first occurrence of the concept of carbon pricing being extended to imports. According to the European Commission, the measure will equalise the price of carbon between domestic products and imports and ensure their equal treatment. At the same time, it will guarantee that the EU’s climate policies are not undermined and encourage non-EU producers to make their production processes as “green” as possible.
Scope of Application and Exemptions
The CBAM will primarily apply to imports of cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen seeing as these sectors have the highest risk of carbon leakage. If the measure proves successful, the European Parliament intends to include plastics and chemicals by 2026. All the sectors covered by the EU Emissions Trading System (ETS) will be included by 2030. Regarding the scope of the CBAM, the goods from all non-EU countries will be covered by it, however, certain third countries that participate in the ETS and are linked to the Union will be excluded as well as the members of the European Economic Area and Switzerland.
CBAM vs ETS
There have been some questions about carbon leakage already being addressed by the Emissions Trading System. Although the ETS is the first such scheme and it has been successful in battling the risk of leakage, it lacks certain elements regarding the investment in greener production, both at home and abroad. This is where the CBAM comes into the picture. Although the two schemes differ in some points, the CBAM will complement the ETS and mirror the ETS price.
System of Certificates
The system will be based on the purchase of certificates by importers. The price will be calculated according to the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. Importers will have to register with national authorities and buy CBAM certificates. They will have to declare annually the number of goods and the amount of embedded emissions in the total goods they imported into the EU in the preceding year and surrender the corresponding amount of CBAM certificates.
Next steps
To ensure legal certainty and stability, the CBAM will be implemented gradually in several phases. In the first (transitional) phase importers will have to report emissions without paying a financial adjustment. This will start in October 2023 and finish at the end of 2025 which will give enough time for the whole system to be phased in. The system is expected to be fully operational in 2026 when the importers will start paying the financial adjustment. Considering the fact that the ETS assigns free allowances to some hard-to-abate sectors, these will need to be phased out as the CBAM is being phased in order to comply with World Trade Organization rules. This is expected to be done gradually over a nine-year period between 2026 and 2034.
The implementation and enforcement of the system will largely fall into the hands of Member States and their authorities. There are still several improvements that must be made regarding the CBAM when it comes to EU legislation, however, if successful, the measure will reinforce the ETS and represent a major step in the EU’s fight against climate change.
