In 2021, the European Union announced plans for a 55% reduction in its greenhouse gas emissions by 2030 compared to 1990 levels, the so called, “Fit for 55”, setting its sights higher than the 40% it had targeted before.
Achieving this more ambitious goal will require the EU to rapidly restructure its high-emission industries. That, in turn, means major polluters in the EU will be asked to pay higher CO2 prices, all but forcing them to switch to more climate-friendly production processes.
On 13 December 2022, the Council and the European Parliament reached a political agreement on the implementation of the new CBAM (Carbon Border Adjustment Mechanism) as part of the “Fit for 55 package”.
The Carbon Border Adjustment Mechanism (CBAM) extends the concept of carbon pricing to imports for the first time.
As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage’. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive import.
CBAM will affect imported products from particularly high-emitting industries such as steel, cement, aluminum, fertilizers and electricity and hydrogen production.
The European Parliament also signaled a clear intention to include plastics and chemicals by 2026 and all sectors covered by the EU Emissions Trading System (ETS) by 2030. At this point, finished or semi-finished products such as cars could also be included.
Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.
The EU’s Carbon Border Adjustment Mechanism (CBAM) is EU landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances to support the decarbonisation of EU industry.
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined.
Once the permanent system enters into force on 1 January 2026, importers will need to quarterly declare the quantity of goods imported into the EU in the preceding quarter and their embedded GHG. They will then surrender the corresponding number of CBAM certificates
Importers will be required to purchase carbon certificates at a price equal to the carbon price set by the EU Emissions Trading System (ETS). Between 2020 and now, this price has increased by approximately 300%. Today’s ETS carbon price is at around 80EUR – by 2030, this price is forecasted to be at around 140EUR.
Countries most likely to be affected by the CBAM include Russia, China, Turkey, the United Kingdom, Ukraine, South Korea and India. Whether the planned tax will be valid in the eyes of the World Trade Organization remains to be seen.
The European Parliament and the Council will now have to formally adopt the new Regulation before it can enter into force.
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Source: EU Commission, World Economic Forum, PWC, dw.com