Background
The European Union (“EU”) took a significant step towards achieving its climate goals with the introduction of the Carbon Border Adjustment Mechanism (“CBAM”) as part of the EU Green Deal.
With the aim of reducing greenhouse gas emissions by 55% by 2030, the CBAM is set to revolutionize carbon pricing for both local products and imports. The CBAM will be phased in over eight years and gradually replace the free allowances provided by the EU Emissions Trading System.
Purpose
The CBAM is intended to address the problem of “carbon leakage” by putting a fair price on carbon emitted during the production of certain carbon-intensive goods that are entering the EU to encourage cleaner industrial production in non-EU countries.
Designed to align with international policies, including World Trade Organization rules, the CBAM will be applied based on the actual declared carbon content of imported goods. The formula used will reflect the impact of the EU Emissions Trading System on similar goods produced within the EU.
Which carbon-intensive goods will initially be impacted by the introduction of the CBAM?
The CBAM will apply to the following:
- Iron and steel
- Fertilizers
- Cement
- Electricity
- Hydrogen
- Aluminium
When will the CBAM come into force?
The CBAM’s transitional phase will run from October 1st, 2023, to December 31st, 2025. During this period, importers can opt for quarterly reporting, with CBAM certificate purchases remaining voluntary. From 2026 onwards, reporting and CBAM certificate purchase will be mandatory as per EU regulations.
During the transitional phase, importers can choose reporting methods, including the new EU method, equivalent third-country national systems, or reporting based on reference values. To ease the reporting process, the EU Commission is developing specialized IT tools, guidance, training materials, and tutorials.
The first report will be due at the end of January 2024, covering the fourth-quarter data from October 1st, 2023.
Starting from January 1st, 2025, only the EU method will be accepted, allowing producers time to adapt.
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