BlogCarbon Border Adjustment Mechanism (CBAM)

CBAM to impose carbon price on EU imports 

Written by

Ulf Narloch

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On December 13, 2022, the European Parliament and the Council agreed on the introduction of a carbon border adjustment for EU imports. CBAM is intended to introduce a carbon-based import levy on carbon-intensive goods starting from 2026. Reporting obligations for importing companies are to take effect as early as October 2023.  

Prevention of carbon leakage 

The EU’s Carbon Border Adjustment Mechanism (CBAM) is designed to reduce the risk of carbon leakage to non-EU countries.The phasing out of free emission allowances for energy-intensive industries in the reform of the EU Emissions Trading System (ETS), increases the carbon costs for manufacturing companies in the EU.  

This leads to a disadvantage compared to producers in non-EU countries, where less or no carbon prices are due. These carbon costs could make it attractive to relocate carbon-intensive production processes from the EU causing CO2 emissions to increase in non-EU countries.  

CBAM complements the ETS reform as an essential measure to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The initial proposal for a new EU regulation establishing a carbon border adjustment was developed as part of the Fit-for-55 package in July 2021. In March 2022, the Council agreed on General approach for establishing CBAM. 

CBAM addresses climate change as a global problem by treating emissions from production processes in non-EU countries equal to those from EU countries. It is designed as a WTO-compliant instrument.  

It also is a measure to strengthen the competitiveness of European industry vis-√†-vis producers in countries with less stringent climate and environmental regulations.  

How CBAM works 

CBAM works as a carbon-based import levy on emissions-intensive goods imported into the EU:  

  1. Calculation based on emissions from the production of imported goods in non-EU countries and verification of these emissions by an independent verifier 
  1. Purchase of CBAM certificates via an EU platform with prices equal to ETS-prices resulting from the trading of emission allowances in the EU carbon market 
  1. Reduction of the CBAM certificates to be surrendered in the amount of the carbon prices paid in the country of origin 
  1. Adjustment of CBAM certificates to be surrendered via a factor that will be ramped up in step with the shutdown of free CO2 allowances in ETS: from 2.5% in 2026 to 100% in 2034 

There is no upper limit on the amount of CBAM certificates that can be purchased for importing goods. And purchased CBAM certificates cannot be traded among importing companies. Also, a transfer of CO2 certificates from CBAM to ETS and vice versa is not possible. Thus, CBAM functions similar to a carbon tax.  

CBAM obligations for companies 

Initially, carbon-intensive goods with a high risk of carbon leakage fall under CBAM. These have been defined as iron and steel, aluminum, cement, fertilizers, electricity and hydrogen. In the future, CBAM is to be expanded to include other goods. 

CBAM brings new obligations for importers of these goods:  

  1. Admission as a CBAM declarant through a one-time authorization; customs authorities will only allow goods from authorized CBAM declarants into the country from 2026 
  1. Management of CBAM certificates to purchase, surrender, sell and cancel CBAM certificates for the calculated emissions of imported goods, from 2026 onwards 
  1. Submission of an annual CBAM report by May 31 of the following year, in which the emissions of the previous year’s imports of goods and the required CBAM certificates are calculated, due for the first time for 2026 
  1. Submission of quarterly reports, one month after the end of each quarter, calculating the volume of goods imported and their emissions; this reporting obligation only applies in the transitional period until the end of 2025 

Overall, CBAM brings new tasks for the calculation of carbon emissions as well as the purchase of CBAM certificates for many companies that have so far hardly been in touch with carbon markets and CO2 management.  

The increased carbon costs through CBAM make green manufacturing processes and decarbonization of supply chains more attractive. CBAM can also shift trade and import structures.  

CBAM to be launched as early as October 2023  

The formal decision by the European Parliament and Council on the new regulation is expected in spring 2023. Further implementing acts must then be prepared during the summer so that the first rules can come into force on October 1, 2023.  

A total of three phases are planned for the carbon-intensive goods initially covered by CBAM: 

  1. Transitional period starting from 1 October 2023, for setting up and testing of data systems at participating actors; in this case, only the reporting obligations apply to affected companies  
  1. Definitive period with fully operational system from 2026 in which CBAM certificates are to be surrendered for the imported goods; approved CBAM declarants are responsible for annual CBAM declarations and purchase of CBAM certificates 
  1. Fully developed system by 2034, in which the CBAM levy is completely phased-in while the allocation of free ETS allowances is cut to zero 

In the meantime, the European Commission is considering the gradual expansion of CBAM to include other goods by the end of the transitional period.  

In parallel, a Climate Club is being set up to strengthen international cooperation on climate protection and carbon pricing.  

Sources and further information: 

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