On 13 December 2022, the European Parliament and Council reached political agreement on the introduction of a carbon border adjustment mechanism (CBAM) (see Council press release).
This was followed, on 18 December 2022, by political agreement on the reform of the EU Emissions Trading System (EU ETS) (see Council press release).
The CBAM and EU ETS are both aimed at reducing carbon emissions by placing a price on carbon. They are intended to be complementary, with the revised ETS applying to intra-EU goods and CBAM applying to goods imported into the EU from regions of the world with less stringent carbon rules.
The overall target of the revised ETS is to achieve a 62% reduction in carbon emissions from the sectors covered by it, by 2030 (up from the 41% reduction that has been achieved so far, since it was first introduced in 2005).
The CBAM would apply a cost of carbon to imports of certain goods based on the carbon emissions associated with their manufacture. It is intended to prevent “carbon-leakage” (i.e. the relocation of energy intensive production from the EU to countries with lower levels of regulation of GHG emissions).
The CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as well as hydrogen, indirect emissions under certain conditions, certain precursors and certain downstream products such as screws and bolts and similar articles of iron or steel. Organic chemicals and polymers (plastics) will not be covered from the start but the European Commission will assess whether to extend the CBAM to those products by 2026.
By 2030, the goal is for all goods covered by the ETS to be included in the CBAM as well. A transitional period for the CBAM will start in October this year. During this period, companies importing in-scope goods will only need to report, but no CBAM allowances must be surrendered. From 2026 onwards, each year, importers will need to surrender an amount of CBAM allowances and pay a carbon levy on their imports, which will be based on the weekly average ETS price, reduced to reflect any carbon price paid in the country of origin as well as any free allocation made under the EU ETS to EU installations producing equivalent goods to ensure a level playing field. Free ETS allowances will be gradually phased out between 2026 and 2034. And until free allocations under the EU ETS end, the CBAM will only apply to the proportion of emissions that do not receive free allowances under the ETS.