The Carbon Border Adjustment Mechanism (CBAM) is a key tool to achieve EU climate neutrality in 2050. The aim is to prevent carbon leakage outside the EU, while encouraging partner countries to establish carbon pricing policies to combat climate change.
The proposal for a regulation establishing a carbon adjustment mechanism at the border was presented by the Commission on July 14, 2021. It addresses the issue of greenhouse gas emissions embedded in certain goods - specified in Annex I of the proposal - when they are imported into the EU customs territory.
This is an agreement of a provisional and conditional nature, the result of negotiations between the Council and the European Parliament. Confirmation by the Member States' ambassadors to the EU and the European Parliament, as well as its adoption by both European institutions, is required to convert it into a final agreement.
The carbon border adjustment mechanism is designed to operate in parallel with the ETS, the European greenhouse gas emission allowance trading system, which is currently the EU's main instrument for meeting CO2 emission reduction targets.
Over time, the mechanism will gradually replace existing ones within the EU to address the risk of carbon leakage, mainly the free allocation of EU ETS allowances.
In fact, in the ETS, emission allowances can be allocated for a fee or for free. In the first case, they are sold through public auctions in which accredited entities participate. In the second case, allowances are allocated free of charge to operators at risk of relocating production to countries with less stringent environmental standards than those in Europe (carbon leakage). Free allocations are reserved for manufacturing sectors and are calculated with benchmarks on the emissions of the most virtuous plants.
In terms of the sectors and products covered by the new standards, the CBAM is expected to cover, at least initially, several specific products in the most carbon-intensive sectors, such as iron and steel, cement, fertilizer, aluminum, electricity and hydrogen, as well as some precursors and a limited number of downstream products. In addition to this, indirect emissions should also be included in the regulation.
Under the tentative agreement, the mechanism would come into effect from October 2023. Initially, a simplified CBAM would be applied - a transitional period in which only reporting requirements are provided, with the aim of collecting data. The length of the transitional period and the full introduction of the CBAM will go hand in hand with the phasing out of free allowances under the ETS for the affected sectors.
This is still under negotiation, and the results achieved will become part of the CBAM regulation. In addition, before the end of the transition period, the Commission will consider whether to extend the scope of the mechanism to other products, eventually to include all those covered by the ETS by 2030.
The objective of the CBAM is to prevent, while respecting international trade rules, the EU's efforts to reduce greenhouse gas emissions within Europe from being offset by an increase in these emissions outside the EU's borders through the relocation of companies to third countries where policies adopted to combat climate change are less ambitious or nonexistent than in the EU, or through increased imports of carbon-intensive products.
The CBAM is part of the Fit for 55 in 2030 package, which is the European Union's plan to target a 55 percent reduction in greenhouse gas emissions by 2030, compared to 1990.
In addition to this, the mechanism is aimed at ensuring balanced treatment between European producers who pay a carbon price under the Emissions Trading Scheme and third-country producers who import into Europe.
The objectives of the mechanism will be achieved through the introduction of so-called "CBAM certificates," which are certificates to be purchased by producers who intend to import goods into Europe to pay the difference between the carbon price in the country of production and the price of carbon allowances in the ETS. This is, therefore, an incentive for non-EU countries to increase their climate ambitions - essentially with regulations aimed at environmental protection and more conscious production - since only countries with climate ambitions in line with those in Europe will be able to export to the EU without having to purchase CBAM certificates.
The countries generally welcomed the proposal to establish the CBAM. Indeed, on March 15, 2022, during the French Presidency of the EU Council, it was possible to reach a general approach in the Council, which forms the basis of today's agreement between the same institution and Parliament.
As stated by the French Minister of Economy, Finance and Recovery, Bruno Le Maire, "The agreement in the Council on the border carbon adjustment mechanism is a victory for European climate policy. It will provide us with a tool to accelerate the decarbonization of industry while protecting it from companies in countries with less ambitious climate targets. It will also encourage other countries to become more sustainable and reduce emissions. Finally, this mechanism responds to our ambitious European strategy of accelerating Europe's energy independence."
Certainly, there are still doubts and concerns about some aspects of the mechanism. The topic at the heart of the discussions is the importance of ensuring the CBAM's compliance with the key principles of the World Trade Organization (WTO). In this regard, the European Parliament's ENVI Committee - Committee on the Environment, Public Health and Food Safety - published a report entitled "Towards a WTO-compatible EU carbon border adjustment mechanism," which was discussed and subsequently adopted by the European Parliament on March 10, 2021. The report clarifies the intent to achieve a WTO-compatible CBAM and EU free trade agreements. Indeed, it is emphasized that the CBAM is to be a transparent mechanism with clear and known rules and procedures, conforming to the principle of non-discrimination against trading partners and striving toward the creation of a better level playing field globally.
Translated by Denise Praticò.