EUROPEAN UNION CARBON BORDER ADJUSTMENT MECHANISM POLICIES (CBAM)
In December 2022, Members of European Parliament and the European Council provisionally agreed to introduce CBAM policies by 1st November 2023. The CBAM is a new carbon regulation designed to help the EU fight climate change. The existing ETS (EU Emissions Trading System) covers all trade within Europe so it will only affect products that are imported into the EU from third countries. This includes the UK.
EU consumers, our customers, will need to submit a report each quarter declaring the total greenhouse gas emissions that are embedded in the products they import. This will include relevant imports from the UK. Stainless steels are included in this list as is aluminium and carbon / low alloy steels.
This is scheduled to commence from October 2023 onwards and initially will be data collection only. However from 2027 there will be a financial cost to importing and the more greenhouse gas emissions are embedded in the products the more the fee. EU customers will have to purchase one CBAM certificate for each tonne of reported direct emissions and the cost will be based on the cost of the latest weekly average ETS (EU Emissions Trading System) carbon price.
The European Commission will have lists of default emission values if your customers cannot get primary values from you, the default values will most likely be higher than the actual levels.
So, from the declaration implementation as of 1/11/2023 until the levy implementation in 2027, the EU will be collecting data and building the default emission value tables.
How to Prepare
- Start by gathering data on your carbon calculations for all the products you export
- Understand how CBAM could affect profitability and relationships with EU customers
- See what the EU’s default values could look like for your products
- Try to reduce your carbon footprint. Your customers will be looking to buy from lower-carbon suppliers and secure long term procurement contracts.
This EU Legislation is going to cause more pain and costs to UK exporters to the EU. The UK is developing its own policy and will increase costs on the products you import but there is no firm timescale yet for imports into the UK.
Negotiators of the Council and the European Parliament reached an agreement of a provisional and conditional nature on the Carbon Border Adjustment Mechanism (CBAM). The agreement needs to be confirmed by ambassadors of the EU member states, and by the European Parliament, and adopted by both institutions before it is final.
I am very pleased that we reached this agreement today. The Carbon Border Adjustment Mechanism is a key part of our climate action. This mechanism promotes the import of goods by non-EU businesses into the EU which fulfil the high climate standards applicable in the 27 EU member states. This will ensure a balanced treatment of such imports and is designed to encourage our partners in the world to join the EU’s climate efforts.
Jozef Síkela, Minister of Industry and Trade of Czechia
This provisional agreement is dependent on some aspects which are relevant for CBAM but need to be spelled out in other pieces of legislation on which negotiations are still ongoing. The Council presidency considers that the CBAM regulation can be formally adopted only once the elements relevant for CBAM are resolved in other related dossiers.
Concerning the products and sectors which fall within the scope of the new rules, CBAM will initially cover a number of specific products in some of the most carbon-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, as well as some precursors and a limited number of downstream products. Indirect emissions would also be included in the regulation in a well-circumscribed manner.
Under the provisional agreement, CBAM will begin to operate from October 2023 onwards. Initially, a simplified CBAM would apply essentially with reporting obligations only. The aim is to collect data. From then onwards, the full CBAM will kick in. It would be phased in gradually, in parallel to a phasing out of the free allowances, once it begins under the revised EU emissions trading system (ETS) for the sectors concerned. This will ensure compatibility of CBAM with international rules on trade.
The phasing out of free allowances for CBAM sectors still needs to be agreed in the context of the ongoing EU ETS negotiations. Further work is also required on measures to prevent carbon leakage on exports.
Ensuring full compatibility of CBAM with international obligations of the EU, including in the area of international trade, remains of fundamental importance.
The financing of administrative expenses of the European Commission, which will take on many centralised CBAM-related administrative tasks, will need to be decided in accordance with the annual EU budget procedure.
The Commission presented its proposal for a regulation establishing a carbon border adjustment mechanism on 14 July 2021. It addresses greenhouse gas emissions embedded in certain goods listed in Annex I of the proposal, upon their importation into the customs territory of the Union, in order to prevent the risk of carbon leakage.
CBAM targets imports of products in carbon-intensive industries. The objective of CBAM is to prevent – in full compliance with international trade rules – that the greenhouse gas emissions reduction efforts of the EU are offset by increasing emissions outside its borders through relocation of production to non-EU countries (where policies applied to fight climate change are less ambitious than those of the EU) or increased imports of carbon-intensive products.
CBAM is designed to function in parallel with the EU’s Emissions Trading System (EU ETS), to mirror and complement its functioning on imported goods. It will gradually replace the existing EU mechanisms to address the risk of carbon leakage, in particular the free allocation of EU ETS allowances.
Technical work on the proposal took place in an Ad Hoc Working Party on CBAM, which the Council specifically established for negotiations on this proposal. The Council reached its position (general approach) on the proposed regulation on 15 March 2022. The European Parliament voted its position on 22 June 2022. Trilogue negotiations between the co-legislators started on 11 July and ended in the provisional agreement reached today.